3M16 net profit of RM62.9m (+33.3% YoY) met our (26%) and market (27%) expectations. No dividends as expected. No changes made to earnings forecasts. New product launch received positively and better product mix is expected to drive earnings growth. Upgrade to Outperform (from Market Perform) with higher Target Price of RM14.70 (from RM13.86). Valuation is attractive after recent share price weakness with sustained earnings growth and dividend yield to support positive rating.

3M16 within expectations. 3M16 net profit of RM62.9m (+33.3% YoY) was within expectations by accounting to 26% of our in-house forecast and 27% of the consensus. No dividend was declared, as expected.

YoY, 3M16 revenue grew 6.1% to RM455.7m, thanks to strong performance in the Singaporean market which recorded revenue of RM136.0m (+24.0%) while Malaysian sales was maintained at similar level of RM319.7m despite the loss of revenue due to the disposal of Luen Heng F&B, indicating positive growth in the local market. Operating profit jumped by 34.2% to RM80.5m as operating margin expanded by 3.7ppt to 17.7%, attributable to favourable product mix and improved operating efficiency. As a result, 3M16 net profit surged 33.3% to RM62.9m.

QoQ, 1Q16 revenue grew 7.9% to RM455.7m driven by Chinese New Year (CNY) festival during the quarter with the Malaysian market recorded 22.5% growth in revenue contribution to RM319.7m. However, operating profit declined by 12.3% to RM80.5m, dragged down by higher operating expenses that were incurred in relation with the CNY marketing campaign. As a result, 1Q16 net profit was 15.5% lower at RM62.9m as compared to RM74.5m registered in 4Q15.

Encouraging new product launch. The Group launched a new product extension, Carlsberg Smooth Draught in Malaysia in April 2016, which received overwhelming response with its appeal as affordable draught beer. Management is confident that innovation in product launches can continue to drive consumption. 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.

Keeping earnings forecasts unchanged. We made no changes to FY16EFY17E earnings forecasts.

Upgrade to Outperform (from Market Perform) with higher Target Price of RM14.70 (from RM13.86). We roll over our valuation base year to FY17E and derive a higher TP of RM14.70, based on an unchanged PER multiple of 17.6x, which is on par with its 3-year mean. Valuation is now more attractive (15.3x PER FY17E, close to -1 SD over 3-year mean) after the share price retreated 7.5% since our downgrade in April 2016. In addition, its sustained earnings growth and decent dividend yield (6.0%-6.4%) also convinced us in upgrading our rating. 

Source: Kenanga Research - 18 May 2016