Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM65.8m (+39.0%) beat our expectation by matching 63.4% of our full-year forecast. Consensus comparison is unavailable as the stock is not widely tracked. The positive deviation can be attributed to the sharper-thanexpected drop in milk powder prices.

Dividends

No dividend was declared as expected.

Key Results Highlights

YoY, 1H15 revenue fell marginally by 4.2% to RM475.2m, which the Group attributed to the planned phasing of new products re-launch in 1Q15, resulting in lower sales volume and also partly due to the GST implementation. However, gross profit jumped 18.9% to RM191.8m, thanks largely to the sharp drop in raw material prices by 40%-45%, which expanded the gross margin by 7.9pptx to 40.4%. As a result, net profit surged 39.0% to RM102.8m.

QoQ, 2Q15 revenue rebounded strongly by 41.3% to RM278.3m due to the re-launch of Dutch Lady Children Formula Milk which resulted in a purchase upswing in between the quarters. Meanwhile, gross profit surged 73.4% due to the higher volume while further aided by the slump in milk powder prices since end-2014. Net profit of RM48.8m indicated overwhelming growth of 186.4% due to the lower base effect.

Outlook

Moving forward, the sustainability of earnings growth outlook will still hinge on the price movement of milk powder. Milk powder prices succumbed to multiple year-low in early-August due to the concerns of slowing demand from China and oversupply situation. However, the volatility persists as latest figures in mid-August show strong rebound of 7.2%-16.7% in a short period which we believe was driven by the 33% output cut by Fonterra, the world’s biggest milk supplier.

Nonetheless, we believe the subdued trend of milk powder prices might be sustained before any strong signal of a recovery in global demand could emerge. Thus, we expect the better margins to be sustained into the coming quarters taking the slump in milk powder prices since early-2015 into account due to the 3-6 months lagging period.

Sales volume might see pressure with the persistently weak local consumer sentiment, particularly after the GST implementation, but we think that the price increase (15% in end-FY14) might mitigate the weakness.

Change to Forecasts

We upgrade our earnings forecast by factoring in lower raw material costs, which resulted in 19.4% and 16.4% upward revisions, respectively, in FY15E and FY16E net profits.

Rating

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Valuation

Correspondingly, with the earnings upgrade, our TP is nudged higher to RM48.07 (from RM42.16), based on unchanged 23.2x FY16E EPS, which is on par with 3-year mean.

Risks to Our Call

Higher-than-expected raw material prices.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 25 Aug 2015