9M16 net profit of RM570.2m (+16.1% YoY) came within both our and market expectations (83%) with a weaker 4Q ahead on seasonality. 9M16 DPS of RM1.40 was also within expectation. No changes to our earnings forecasts. Earnings growth is expected to slow to 3.5% in FY17 in view of the normalization in commodities prices. We maintain MARKET PERFORM with unchanged TP of RM82.10 on moderating growth prospect.

Results in line, 4Q16 to be weaker. 9M16 net profit of RM570.2m (+16.1%) accounted for 83% of both our in-house and consensus forecasts. We deem the result as within expectations as historically the 9M net profits based on the past 5 years averaged 82% of full-year net profits. As expected, a 2nd interim DPS of 70.0 sen was declared, lifting 9M16 DPS to RM1.40 (vs. 9M15:RM1.30) which is in line with our forecast.

YoY, 9M16 revenue grew healthily by 4.8% to RM3.8b driven by growth in both domestic and export sales thanks to successful marketing strategy and innovative product launches. 9M16 gross profit increased by 9.6% to RM1.5b with gross margin expanding by 1.8ppt as a result of favourable commodities prices and better operating efficiency. As a result, 9M16 net profit surged 16.1% to RM570.2m, further aided by the lower effective tax rates of 16.8% (vs 9M15:19.4%).

QoQ, 3Q16 revenue inched up marginally by 2.1% to RM1.3b. Meanwhile, 3Q16 gross profit declined by 5.8% to RM491.3m with gross margin narrowing to 38.9% from 42.2% in 2Q16 which we think is attributable to the higher input costs as a result of normalization in commodities prices. 3Q16 PBT dipped at a greater quantum of 32.8% to RM185.2m as the Group remained committed in marketing and promotional activities in order to consolidate its market position. As a result, 3Q16 net profit fell 27.2% to RM160.7m.

Challenging times ahead. While the company is on course to achieving our profit growth forecast of 16.3%, we are turning cautious on the longer term outlook. Earnings growth is expected to slow to 3.5% in FY17 in view of the diminishing advantage of lower raw material prices as commodities price trend normalize. On the flipside, we expect the heavy investment in brand-building exercise to protect or improve its market share, and the continuous improvement in operating efficiency to mitigate any inflationary pressures. Thus, we are maintaining our NEUTRAL stance on the company.

Earnings estimates kept unchanged. We made no changes to our earnings forecasts.

Reiterate MARKET PERFORM with unchanged Target Price of RM82.10.Our TP is based on unchanged 27.1x FY17E EPS, in line with +0.5 SD over 5-year mean. We think that the valuation is justifiable by its market leading position and established brand name in the F&B market. However, we are cautious on its moderating growth prospect particularly after considering the impressive achievement in FY16 acting as a high base and the end of the favourable run in commodities prices.

Source: Kenanga Research - 26 Oct 2016