Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM115.8m (+52.5%) is above our expectation by matching 93.5% of our full-year forecast. Consensus comparison is unavailable as the stock is not widely tracked. The positive deviation can be attributed to our underestimating the impact of lower raw material prices to earnings margin.

Dividends

As expected, DPS of RM1.10 was declared, lifting YTD DPS to RM2.20.

Nonetheless, the YTD DPS is still slightly below our initial expectation of RM2.30 due to a lower pay-out ratio.

Key Results Highlights

YoY, 9M15 revenue fell marginally by 0.8% to RM730.8m as we believe the volume decline arising from product relaunching has been buffered by the c.15% price increase in end FY14. Operating profit surged 51.0% to RM154.6m which the Group attributed to lower raw material costs (9M15 milk powder prices fell 37.7%-44.9%) and positive foreign currency hedging effects, which expanded operating margin by 7.3ppt to 21.2%. As a result, net profit jumped 52.5% to RM115.8m.

QoQ, 3Q15 revenue was 8.2% lower at RM255.6m due to high base effect as 2Q15 was aided by-product re-launch. Operating profit managed to inch up by 0.3% to RM65.7m thanks to favourable raw material prices. Net profit climbed 2.4% to RM50.0m, which was a record quarterly profit for the Group, further helped by a marginally lower effective tax rate of 24.0% (2Q15: 25.7%) as well.

Outlook

Moving forward, the sustainability of earnings growth outlook still hinges on the price movement of milk powder. Milk powder prices spiked up in September (MoM up 25.5%-32.6%) after Fonterra’s move to reduce the amount of products on offer but have since normalized starting in end-October (November average down 9.2%-11.1%) due to the weak global demand and ample production supply.

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.

Earnings growth is forecasted to be at 41.6% and 10.5% in the next two years post-earnings upgrade. The growth is supported by the margin expansion on the back of sustainable low raw material prices. Although sales volume might face pressure with the persistently weak local consumer sentiment, we think that the price increase (15% in end-FY14) and strong brand are mitigating factors.

Change to Forecasts

We lift our FY15E-FY16E net profits by 25.6%-29.6% after assuming higher profit margins in our earnings forecasts.

Rating

Upgrade to OUTPERFORM (from MARKET PERFORM)

Valuation

Correspondingly, with the earnings upgrade, our TP is nudged higher to RM58.51 (from RM48.07), based on an unchanged 3-year mean of 21.8x (over FY16E EPS of 268.4 sen).

Risks to Our Call

Higher-than-expected raw material prices.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 18 Nov 2015