Period

1Q16

Actual vs. Expectations

Net profit of RM40.9m (+1.4%) was below expectations, accounting for only 19.5% of our inhouse forecast and 18.6% of the streets’ estimate. The negative deviation can be attributed to the softer-than-expected egg prices.

Dividends

None as expected.

Key Results Highlights

YoY, 1Q16 revenue was flattish (+0.3%) at RM655.3m. The weak performance in Palm Oil Activities (POA) (-13.5%) due to the lower CPO prices was mitigated by the higher revenue in Marine Product Manufacturing (MPM) (+8.7%), which was driven by strong demand from China. Meanwhile, operating profit increased by 18.1% to RM68.3m but PBT only rose 4.9% due to higher finance expenses (+56.0%) amid mixed performances from operating divisions. PBT from Integrated Livestock Farming (ILF) dipped 29.6% to RM13.0m as a result of softer egg prices while MPM’s PBT surged 32.8% to RM36.5m thanks to higher sales volume and better product margin.

QoQ, 1Q16 revenue declined slightly by 1.0%, mainly attributable to a drop in ILF (-4.1%) resulting from a delay in shipments delivery of feed raw materials to Argentina due to a port strike. We understand that the shipments have arrived in late- July. PBT rose 3.9% to RM52.8m thanks to POA on increase in FFB production while the weakness in ILF was offset by the strong performance in MPM. As a result, net profit rose 6.7% to RM40.9m.

Outlook

MPM continued to outperform the other operating divisions thanks to the higher demand for fishmeal from China and the resilient demand of surimibased products. Although the weak 1Q16 numbers in ILF was partly due to the one-off blip in shipments delay, we remained cautious on the division due to the softening egg prices (down c.6% YoY). Meanwhile, POA earnings are likely to be capped by the weak CPO prices.

Earnings growth is expected to be healthy at 7.8% and 11.5% over the next 2 years underpinned by the defensive nature of its products, which are in the consumer staple food market that are less vulnerable to the weak consumer sentiment.

Change to Forecasts

We trim our FY16E and FY17E net profits by 3.7% and 3.2%, respectively, as we assume lower margin for ILF division due to the weaker-thanexpected farm produce prices.

Rating

Maintain Market Perform

Valuation

Correspondingly with the earnings cut, our Target Price is nudged lower to RM4.16 (from RM4.19) after rolling over the valuation base year to FY17E. Our TP is based on unchanged 23x PER.

Risks to Our Call

Higher-than-expected egg prices

Lower-than-expected production costs

Source: Kenanga Research - 27 Aug 2015