Period

2Q16/1H16

Actual vs. Expectations

1H16 net profit of RM96.1m (+8.5%) accounted for 47.5% of our full-year forecast and 44.6% of the streets’ estimates. We deem the results as within both our and consensus expectations as we envisage earnings to be boosted by the recovery in egg prices.

Dividends

None as expected.

Key Results Highlights

YoY, 1H16 revenue increased marginally by 2.7% to RM1.3b mainly driven by the strong growth (14.6%) in Marine Product Manufacturing (MPM) division thanks to robust demand for surimi-based products. Meanwhile, PBT was 9.7% higher at RM123.5m also attributed to the stellar performance in MPM division as its PBT margin expanded 1.6ppt to 13.4% on the back of weaker MYR as well as higher operating efficiency. However, Palm Oil Activities (POA) and Integrated Livestock Farming (ILF) divisions recorded PBT decline of 28.9% and 15.4%, respectively, as the former was hit by weaker CPO prices while the latter was dragged down by lower egg prices. As a result, net profit grew 8.5% to RM96.1m.

QoQ, 2Q16 revenue climbed 5.4% to RM690.4m owing to growth from both MPM and ILF divisions. ILF division grew 7.2% from a lower base effect arose from a delay in shipments delivery of feed raw materials to Argentina due to a port strike in 1Q16. Meanwhile, PBT surged 33.9% to RM70.7m thanks to steady growth in MPM division (+17.1%) and the normalization in ILF division from the abovementioned blip which was further aided by the recovery in egg prices (c.5%) that brought the division’s PBT higher by 87.4% to RM24.4m. As a result, net profit jumped 34.8% to RM55.2m.

Outlook

MPM continued to deliver consistent and steady performance thanks to the higher demand for fishmeal from China and the resilient demand of surimi-based products; thus, we expect the division to sustain the growing momentum and underpin the Group’s growth.

Meanwhile, the ILF division has recovered from the blip in relation to delay in shipments which resulted in the strong spike-up in QoQ earnings but the rebound in egg prices, driven by healthy demand growth and limited supply, will support the growth pace in the division.

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

Change to Forecasts

We made no changes to our earnings forecasts.

Rating

Maintain Market Perform We retain our rating despite the negligible total return (including dividend yield), which actually calls for a rating downgrade as we think that the stretched valuation (close to +1.5 SD over 5-year mean) is justified by the fundamental and positive outlook.

Valuation

No changes to our Target Price of RM4.16 based on unchanged 23x FY17E. PER.

Risks

Lower-than-expected egg prices

Higher-than-expected production costs

Source: Kenanga Research - 23 Nov 2015