FY16 core earnings of RM192.0m (+5%) missed our (by 7%) and market (by 9%) expectations. FY16 DPS of 4.25 sen was below our forecast of 5.0 sen. FY17E earnings trimmed by 6% while FY18E earnings introduced with 8% growth. Healthy earnings growth to be underpinned by Marine Product Manufacturing (MPM) division. Target Price maintained at RM4.16 and we maintain UNDERPERFORM due to lofty valuations which may have already priced in the strong fundamentals.

Results below expectations. FY16 core net profit of RM192.0m (+4.9%) missed expectations by matching only 92.6% of our in-house forecast and 91.3% of the consensus’ estimates. The negative deviation can be attributable to weaker-than-expected performance from Integrated Livestock Farming (ILF) division due to unfavorable farming conditions. The Group proposed a final DPS of 4.25 sen for FY16 (vs. FY15: 4.25 sen) which was below our forecast of 5.0 sen.

YoY, FY16 revenue grew 5.4% to RM2.9b mainly thanks to solid performance in MPM (+13.9%) as the robust sales of its product were further aided by the weakened MYR while fish catch improved due to the hot weather as a result of El Nino. Meanwhile, FY16 core PBT rose in line with revenue growth by 5.0% to RM249.4m, driven solely by growth in MPM division (+28.5%) as the other major earnings contributor, ILF (-25.1%) fell prey to the hot weather which affected farm productivity while egg prices were lower in comparison to the strong base in FY15. As a result, FY16 core net profit grew 4.9% to RM192.0m with margin staying stable at 6.7%. (-0.1ppt from 6.8% in FY15).

QoQ, 4Q16 revenue inched up 4.2% to RM768.9m driven by ILF (+12.2%) on higher volume of raw material traded while MPM sales declined by 11.5% on seasonality. 4Q16 PBT dipped 35.4% to RM49.4m as all divisions recorded weaker earnings. PBT from ILF fell 39.9% to RM13.7m as due to lower farming efficiency caused by hot weather, weaker MYR and diseases while PBT from MPM shrank by 29.0% in line with the lower sales. As a result, 4Q16 net profit fell 34.2% to RM38.1m.

MPM to anchor growth. Looking forward, we are forecasting healthy earnings growth of 10.1%-8.8% in the next 2 years, mainly underpinned by the resilient MPM division. We expect ILF to normalize gradually with the more favourable farming conditions while Palm Oil Activities (POA) division will stay subdued with CPO price not expected to soar.

Trimming FY17E forecast. We toned down FY17E net profit by 6.3% to account for the weaker contribution in ILF division while rolled out FY18E earnings which implied earnings growth of 8.2%.

Maintain Underperform with unchanged Target Price of RM4.16. Our TP is unchanged at RM4.16 after we roll over our valuation base year from FY17 to CY17, based on unchanged 23.1x PER, which is on par with +0.5 SD over its 5-year mean.

Solid but pricey. Although we like the Group for its proven earnings track record and the strong fundamental to sustain the earnings growth, we think the valuation is rich (trading at 24.6x PER CY18E, above +1 SD over 5-year mean) while the dividend pay-out ratio is also less rewarding (30% of earnings, yield at <1.5%) compared to other large-cap staple food companies under our coverage while none of them are ascribed valuation higher than +0.5 SD over mean. As such, we think that the risk-reward appeal is less than compelling at this juncture as the positives might have been fully priced in.

Source: Kenanga Research - 31 May 2016