Period

1Q16/3M16

Actual vs. Expectations

3M16 net profit of RM220.7m (+17.5%) is above expectations, accounting for 33.5% of our in-house forecast and 34.7% of the consensus. The positive deviation can be attributed to higher-than-expected margin driven by low raw material prices and operating efficiency.

Dividends

None, as expected.

Key Results Highlights

YoY, 3M16 revenue grew 2.8% to RM1.3b as a result of successful marketing activities and product launches despite a boosted 1Q15 comparison base due to pre- GST front-loading. Gross margin expanded by 0.7ppt to 39.7% which pushed gross profit higher by 4.6% to RM521.5m. Net profit surged 17.5% to RM220.7m due to lower operating expenses (-4.4%) and lower effective tax rate of 20.0% (vs 1Q15: 23.1%).

QoQ, 1Q16 revenue was 9.6% higher which we think is attributable to the Chinese New Year (CNY) festivity. Gross margin expanded by 1.3ppt on a favourable trend of raw material prices. Operating profit more than doubled to RM284.9m mainly due to the heavy year-end marketing activities on early preparation for CNY. As a result, net profit was recorded at RM220.7m (+121.1%).

Outlook

We are impressed by the set of results as it marked an unprecedented net profit level of above RM200m for the Group. The growth was comprehensive with both top line and bottom line growth as the Group’s strategy in reinvesting the savings from raw material cost bore fruits. We expect the momentum to be sustained with the continuous effort in marketing as well as improving operating efficiency.

Moving forward, we foresee the subdued trend of commodity price to continue in view of the lacklustre global economy outlook and thus expecting the Group to continue benefiting from that trend. We also anticipate the Group to stay committed in marketing and promotional activities in order to stimulate consumer sentiment and encourage spending.

Change to Forecasts

We upgrade FY16E and FY17E net profits by 4.2% and 2.2%, respectively, after assuming higher profit margins to account for the higher-than-expected operating efficiency.

Rating

Upgrade to Outperform from Market Perform

Valuation

We upgrade our Target Price to RM82.10 (from RM76.20), correspondingly after the earnings upgrade and roll-over of valuation base year to FY17E. Our TP is based on unchanged PER of 27.1x FY16E EPS, which is in line with +0.5SD over 5-year mean.

Risks

Higher-than-expected operating costs.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 27 Apr 2016