Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit of RM228.5m (+8.0%) after adjusting for a one-off impairment loss of RM12.6m arising from the divestment of Luen Heng F&B Sdn. Bhd. (LHFB), was above expectations, exceeding our in-house and consensus’ forecasts by 8.6% and 10.7%, respectively. The positive deviation can be attributed to higher-than-expected profit contribution from associates.

Dividends

As expected, final DPS of 67.0sen was declared, bringing FY15 total DPS to 72.0sen (vs FY14: 71 sen), which is in line with our expectation. DPS translates into a pay-out ratio of 96.9%.

Key Results Highlights

YoY, FY15 revenue grew 1.5% to RM1.6b thanks to gallant performance in Singapore market with higher sales of RM545.4m (+31.8%) while Malaysia market recorded decline of 8.7% to RM1.1b. Operating profit grew 6.8% to RM285.7m again owing to strong performance in Singapore (+67.8% to RM107.5m) on the back of better product mix and cost efficiencies. Meanwhile, profit contribution from Sri Lankan associate grew 46.4% to RM16.1m, resulting in core net profit growth of 8.0% to RM228.5m.

QoQ, 4Q15 revenue grew 4.2% to RM422.5m, driven by higher sales from Singapore market by 13.3% to RM161.5m. Operating profit jumped 17.3% to RM91.7m mainly due to the surge in profit contributions from Malaysian operations despite the lower revenue by 0.8% which we believe can be attributed to the recognition timing of marketing expenses and better cost efficiencies. As a result, net profit grew 19.2% at RM74.5m.

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 Cider 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 37.6% from 24.0% 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 as mentioned above.

Change to Forecasts

We upgrade FY16E net profit by 4.8% after assuming higher profit contributions from associate. We introduce FY17E forecast implying net profit growth of 6.0%.

Rating

Maintain OUTPERFORM

Valuation

Despite earnings upgrade, our Target Price is unchanged at RM13.86 after we apply lower PER of 17.6x (from 18.5x) as we opt to be more conservative on the valuation to reflect the potential risk of excise duty hike which the brewery sector has been spared for the past 10 years. The valuation is on par with its 3-year mean and also in line with our recent valuation downgrade in peer GAB (OP; RM16.36) in January 2016.

Risks to Our Call

Unfavourable outcome of tax claims lawsuit.

Sector risk: Higher-than-expected illicit volume.

Sector risk: Excise duty hike.

Source: Kenanga Research - 29 Feb 2016