Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit of RM91.8m (-0.7%) after adjusting to one-off impairment loss of RM12.5m was below expectations by matching 41.7% and 42.5% of our inhouse and consensus’ forecasts, respectively. The negative deviation can be attributed to the higher raw material prices due to the weakened MYR.

Dividends

As expected, DPS of 5.0 sen was declared (1H14: 5.0 sen).

Key Results Highlights

YoY, 1H15 revenue grew marginally by 3.7% toRM831.8m driven by strong performance in Singapore (+35.0%) on the back of higher sales volume and better product mix. Core operating profit shrank 3.0% to RM115.6m as operating margin narrowed by 1ppt to 13.9% due to higher raw material cost led by depreciating MYR. Core net profit declined marginally by 0.7% to RM91.8 m thanks to lower effective tax rate of 22.3% (1H14: 22.9%).

QoQ, 2Q15 revenue fell 6.3% due to the lower sales in Malaysia (-15.4%) as 1Q15 was boosted by the Chinese New Year celebrations. Core operating profit declined by 7.1% due to lower sales in Malaysia but mitigated by strong growth in Singapore due to the reasons mentioned above. As a result, core net profit of RM44.6m was 5.6% lower comparatively.

Outlook

Moving forward, we expect the better product mix with more investment and brand building on the premium brands, including Somersby Apple Cider, Somersby Pear Ciders and Kronenbourg to drive the earnings growth as sales volume growth is expected to be subdued due to the soft consumer sentiment.

The exposure in Singapore has grown to 29% from 22.3% a year ago which we think is positive as it provides an outlet for the Group to diversify the risk away from the local market, which is dogged by persistent weak consumer sentiment and contraband's beers.

Meanwhile, we also laud the Group’s effective cost management programmes, which helped to reduce the impact of MYR depreciation to the operating costs. We think the initiative is essential in the tough operating environment in Malaysia due to competition from contrabands as well as weak consumer sentiment.

Change to Forecasts

We imputed higher cost assumption to our earnings model, which resulted in 4.4% and 3.4% downgrades in FY15E and FY16E net profits.

Rating

Upgrade to Outperform from Market Perform

The stock is currently trading at undemanding 14.9x PER FY16E, which is close to its -2 SD 3-year mean after the recent sell-down. The stock offers an attractive dividend yield of 6.7%.

Valuation

Our Target Price was lifted to RM13.86 (from RM13.23), after rolling over the valuation base year to FY16E. TP is based on unchanged 18.5x PER.

Risks

Unfavourable outcome of tax claims lawsuit.

Sector risk: Higher-than-expected contrabands volume.

Source: Kenanga Research - 26 Aug 2015