Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit of RM154.0m (+3.6% YoY) after adjusting for a one-off impairment loss of RM12.6m arising from the divestment of Luen Heng F&B Sdn. Bhd. (LHFB), is within expectations, matching 73.1% and 74.1% of our in-house and consensus’ forecasts, respectively.

Dividends

None, as expected.

Key Results Highlights

YoY, 9M15 revenue of RM1.2b was up 2.2% as the higher sales in Singaporean market (+29.8%) mitigated the weaker sales in Malaysia (-6.8%). Operating profit was flattish at RM194.0m as the contribution from Malaysia was lower (-16.2%) due to the lower sales but again aided by the stronger profit from Singaporean market (+55.3%). As a result, core net profit grew 3.6% to RM154.0m.

QoQ, 3Q15 revenue was flattish at RM405.7m between the quarters with the stronger sales in Singapore (+8.1%) offsetting the lower sales in Malaysia (-2.7%). Operating profit managed to surge 40.4% to RM78.2m while operating margin expanded strongly by 5.5ppt to 19.3% which we think is attributable to the recognition timing of marketing expenses. As a result, core net profit jumped 40.2% to RM62.5m.

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 earnings growth as sales volume growth is expected to be subdued due to the soft consumer sentiment.

The exposure in Singapore has grown to 31.0% from 24.4% a year ago which we think is positive as it provides a market for the Group to diversify away from the local market which is dogged by persistently weak consumer sentiment and contrabands beers.

Meanwhile, we also laud the Group’s effective cost management programmes, which had helped to reduce the impact of MYR depreciation on 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

No changes to our earnings forecasts.

Rating

Maintain OUTPERFORM

Valuation

Our Target Price is unchanged at RM13.86 based on 18.5x PER on FY16E. The valuation is on par with its 3-year mean, justifiable with the healthy earnings growth of 9.6% in FY16E.

Risks to Our Call

Unfavourable outcome of tax claims lawsuit.

Sector risk: Higher-than-expected contrabands volume.

Source: Kenanga Research - 1 Dec 2015