A solid chocolate confectionery products and layer cake player. Apollo Food (APOLLO)’s products are mainly divided into two main categories, namely: (i) Chocolate Wafer products, and (ii) Layer Cake, Chocolate Layer cake and Swiss Roll products. Apart from Malaysia, the group’s products are also distributed to 13 overseas markets which contributed 39% of its FY15 turnover, according to Bloomberg estimate. The marketing and distribution segment accounted for c.51.5% of the group’s total revenue in FY15 with the balance 48.5% coming from the manufacturing segment.

Best ever financial results in 1H16. Despite recording a relatively flattish revenue growth of 0.7% YoY in 1H16, PBT managed to climb 79% YoY to RM27.4m, mainly attributed to: (i) better gross profit margin (28.1% vs. 26.3% in 1H15) on the back of lower raw material prices, (ii) higher operational efficiency, and (iii) favourable exchange rate. Coupled with a lower taxation rate of 24% (vs. 31.2% a year ago), the group’s net profit has soared nearly doubled to RM20.8m (98% YoY) in 1H16. Indeed, 1H16 results mark the best ever 1H financial results to cross the RM20m net profit milestone.

Automated operations to drive greater efficiency. EBIT margin has expanded tremendously to a multi-year’s high of 26.4% (vs. 14.9% year ago) in 1H16. The massive margin expansion, we believe, was partially driven by its higher operational efficiency as a result of the adoption of fully automated European-technology equipment to use less labour. The group had spent a total of RM8.5m to enhance its machinery, tools and equipment over the past two financial years.

Record profit year may be in the making. While the operating environment is expected to remain competitive, the relatively stable (or downside bias) raw materials' prices are expected to provide some cushions to earnings. Coupled with the higher operational efficiency and favourable exchange rate, there is a strong likelihood for the group to deliver higher net profit in FY16. Note that, APOLLO’s 1H normally accounted for c.42%-52% of the full-year results for the past three financial years, thus suggesting that the group may record RM39m-RM48m net profit in FY16.

Strong cash pile of RM116m (or RM1.46/share) with zero gearing as at end-1H16 (vs. RM89m net cash recorded as at end-FY15 of which 42.5% were denominated in Euro and USD). The group’s reserve, meanwhile, also surged to RM185m from RM164m in FY15. With the current share outstanding of 80m coupled with an estimated low free-float of 22% (based on Bloomberg estimate), we believe APOLLO is well positioned to improve its share liquidity, if needed.

Rooms to improve dividend yield. APOLLO has continued to reward its shareholders since 1997 with payout ratios of 17.5% to 99.2%. The group has declared a first and final DPS of 25.0 sen in FY15, implied a dividend payout ratio of 79% and 4.5% dividend yield. With the earnings set to be improved in FY16, this suggests that the group has room to reward shareholders further, if needed, in view of its strong balance sheet. We have assumed 79% dividend payout ratio for FY16, implying a DPS of 37.9 sen or 6.8% dividend yield.

Targeting a tepid revenue growth for now. While we have yet to speak to the management, we are opting to be conservative for now and factored in a mere 1.2% YoY (vs. 2.0% CAGR since FY12) organic revenue growth into our financial model with a targeted 24% EBIT margin. This suggests that APOLLO could potentially achieve a net profit of RM38.4m in FY16. We will issue a follow-up report should we are able to meet with the management.

Key investment risks include (i) tepid revenue growth, (ii) smaller-thanexpected margin expansion, and (iii) unable to extend one of its leasehold lands, which is currently occupied by a factory, in Larkin, Johor.

TRADING BUY with TP of RM6.48. We fairly value the stock at RM6.48, based on a conservative targeted FY16 PER of 13.5x, a 30% premium to the FBM Small Cap Index’s forward PER of 10.4x due to its strong balance sheet. 

Source: Kenanga Research - 19 Jan 2016