12M16 net profit of RM265.7m (+24.0%) met our (102%) and market (100%) expectations. As expected, second interim DPS of 35.0 sen was declared, lifting 12M16 DPS to 85.0 sen (vs 12M15: 71.0 sen). No changes to earnings forecasts. Moving forward, the sustainability of the growth momentum will be supported by effective cost management and strategic marketing activities. Maintain OUTPERFORM with higher TP of RM18.48 (from RM16.90) on higher valuation justified by consistent delivery of solid earnings growth.

Results within expectation. 12M16 net profit of RM265.7m (+24.0% YoY) matched our in-house forecast (102%) and the consensus estimates (100%). As expected, second interim DPS of 35.0 sen was declared, lifting 12M16 DPS to 85.0 sen (vs 12M15: 71.0 sen) which represents a payout ratio of 97%.

YoY, 12M16 revenue grew 5.7% to RM1.8b mainly driven by higher sales and favourable product mix, while the enhancement efforts by the authorities to tackle contrabands have also helped. Operating profit leapt 19.5% to RM352.9m as operating margin expanded by 2.2ppt to 19.1% thanks to higher production efficiency and costs control, further aided by effective marketing strategy. Meanwhile, savings from lower interest expense (-67.8%) and lower effective tax rate of 24.5% (from 26.7% in 12M15) catapulted net profit by 24.0% to RM265.7m.

QoQ, 4Q16 revenue was flattish at RM459.5m (+0.1%) as the strong sales led by Chinese New Year festival in 3Q16 was sustained by the event of UEFA Euro 2016 in 4Q16. However, 4Q16 operating profit of RM79.8m was 12.2% higher vis-à-vis 3Q16 mainly due to difference in recognition timing of marketing expenses. As a result, 4Q16 net profit surged 19.7% to RM60.9m, further helped by a lower effective tax rate of 23.5% (vs 3Q16: 27.6%).

Convincing growth to continue. We are buoyed by the excellent results, which marked the eighth quarter in a row which the Group recorded YoY growth. We are also relieved as our positive call on the stock is justified with the Group continuing to grow earnings holistically with both top line and bottom line showing improvement despite the unfavourable market condition and subdued consumer sentiment. Moving forward, we are hopeful of the sustainability of the growth momentum which will be supported by effective cost management and strategic brand-building or marketing activities.

Earnings forecast kept unchanged. We make no changes to our earnings forecasts.

Maintain OUTPERFORM with higher Target Price of RM18.48 (from RM16.90). Post-results, we are lifting our TP by ascribing higher FY17E PER of 19.6x (from 18x). The valuation is on par with its 5-year mean PER (vs below 5- year mean PER previously). The consistent delivery of earnings growth has prompted us to upgrade the valuation considering the feat was achieved on the back of weak consumer sentiment and negative economic headwinds. Share price has surged >30% YTD to reflect the solid earnings, but we expect further upside as earnings growth shown no signs of slowing down while valuation is not excessive with the added bonus of decent dividend yields of >5%. HEIM remained as our pick of the sector as we like its market-leading position backed by strong portfolio of brands.

Source: Kenanga Research - 19 Jul 2016