FY16 core earnings of RM55.3m (+8.4%) beat our (114%) and market (117%) expectations due to better-than-expected performance in MB business. FY16 DPS of 9.0 sen was above expectations due to special dividend. FY17E earnings upgraded by 7% on higher margins while FY18E earnings introduced (8% growth). Reiterate Outperform rating with higher TP of RM1.79 (from RM1.72) correspondingly with earnings upgrade.

Above expectations. FY16 core net profit of RM55.3m (+8.4% YoY) was above expectations by accounting to 114% of our in-house forecast and 117% of the streets’ estimate. Core net profit was derived after stripping off impairment loss on goodwill (RM3.0m in FY16, RM3.5m in FY15). The positive deviation can be attributed to better-than-expected performance in Manufacturing of Beverages (MB) division. DPS of 6.0 sen (inclusive special dividend of 3.0 sen) was declared, lifting YTD DPS to 9.0 sen, which represents a pay-out of 74%. DPS was above expectations due to the special dividend.

YoY, FY16 revenue fell marginally by 1.1% as the weakness in Café Chain (CC) business (-10.6%) was offset by the robust sales in MB division (+10.4%). Core PBT rose 5.3% to RM71.2m again thanks to the steady performance in MB driven by stronger sales and higher PBT margin (+2.7ppt) which we believe was partly due to the successful restructuring of its export sales channel. Meanwhile, CC division was sluggish with PBT contribution shrinking 21.4% to RM23.4m, dragged down by lower sales on the back of subdued consumer sentiment throughout the year. As a result, core net profit grew 8.4% to RM55.3m.

QoQ, 4Q16 revenue grew 2.3% to RM104.5m with both operating segments recording marginal growth. It was encouraging to note that sales in CC have recorded QoQ growth for the 4th consecutive quarter, while the profit and profit margin have also improved in line with the revenue growth. Meanwhile, PBT from MB division surged 54.8% to RM16.9m driven by higher sales and the swing in recognition of marketing expenses. Coupled with the normalized effective tax rate of 12.7% (3Q16: 36.0%), net profit jumped 92.9% to RM21.4m.

Right strategies adopted. We take comfort in the commendable results as the Group has improved its earnings sequentially for the fourth quarter in a row after a dismal start in FY16. Thus, we believe the strategies deployed are effective and we expect the efforts to be sustained moving forward.

MB taking charge. While CC division is still under the siege of weak consumer sentiment due to the more discretionary demand nature, MB division has been able to cushion the downside thanks to the resilient demand for its FMCG products. FY16 revenue contribution has risen to 50.7% from 45.4% in FY15, suggesting that the mix is skewing towards the more defensive MB division which we think should provide investors more assurance and stability in earnings.

Earnings upgraded. We raise FY17E net profit by 7% after assuming higher margin for CC division and we also roll out FY18E forecast, which implied a net profit growth of 7.9%.

Maintain Outperform with higher Target Price of RM1.79 (from RM1.72). Our TP is raised correspondingly with the earnings upgrade, based on unchanged 14.1x PER FY17E. The valuation is slightly below -0.5SD over its 3- year mean which we think is reflective of the challenging outlook in the CC division. The stock is now trading at 11.3x PER FY17E (below -1 SD over the 3-year mean) which we think is unjustified in view of its healthy earnings growth moving forward and sturdy balance sheet (net cash of RM153.5m or 34.0 sen/share) as the market might have over-played concerns on the earnings risk in CC division.

Source: Kenanga Research - 27 May 2016