1H16 core net profit of RM114.3m (+25.0% YoY) met our (47%) and market (48%) expectations. As expected, a first interim DPS of 5.0 sen was declared (vs 1H16: 5.0 sen). The Group is anticipating the subdued consumer sentiment to persist and thus we think product innovation and brand-building initiative are keys to mitigate the weakness. Downgrade to MARKET PERFORM with unchanged TP of RM14.70 as we think the stock is fairly valued after YTD run-up of 28%.

1H16 within expectations. 1H16 core net profit of RM114.3m (+25.0% YoY) was within expectations, accounting to 47% of our in-house forecast and 48% of consensus. Note that 1H15 core net profit has been adjusted for impairment loss of RM12.5m arising from the divestment of Luen Heng F&B Sdn Bhd (LHFB) in May 2015. As expected, first interim DPS of 5.0 sen was declared (vs 1H16: 5.0 sen).

YoY, reported 1H16 revenue grew 2.4% to RM851.5m. The growth would have been 10.3% after adjusting for the LHFB disposal. The top line growth was driven by both domestic and Singaporean markets thanks to effective marketing activities and new product launches. 1H16 core operating profit jumped 27.3% driven by favourable changes in portfolio mix, and higher operating efficiency. As a result, 1H16 core net profit surged 25.0% to RM114.3m.

QoQ, 2Q16 revenue dipped 13.1% to RM395.8m on seasonality as 1Q16 was boosted by Chinese New Year in Malaysia with the domestic sales dropping 19.5% to RM257.3m. The sales growth in Singapore was flattish (+1.8%) as the phasing of demand led by Chinese New Year was earlier in 4Q15. In line with the weakness in top line, 2Q16 core operating profit fell 17.0% to RM66.8m while core net profit slid 18.4% to RM51.4m.

Innovation and brand-building to mitigate weakness. The Group is expecting the subdued consumer sentiment and challenging macroeconomics to remain in the near term. However, we think innovation in product launches and effective marketing activities will 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 outlook moving forward.

Keeping earnings forecasts unchanged. We made no changes to FY16E/FY17E earnings forecasts.

Downgrade to MARKET PERFORM (from OUTPERFORM) with unchanged Target Price of RM14.70. We maintain our TP based on unchanged 17.6x FY17E, which is on par with its three-year mean. YTD, its share price has surged 28.0% which we think have priced in the positives in the strong earnings growth. In view of pedestrian earnings growth in the next two years (6.2% and 6.0%), we think that the stock is fairly valued as we do not see further catalysts to upgrade our valuation while the dividend yield of >5% is expected to support the share price.

Source: Kenanga Research - 24 Aug 2016