9M16 net profit of RM43.1m (-26.7% YoY) was within our expectation (at 76.7% of forecast). 9M16 DPS of 15.0 sen was also within expectation. No changes were made to FY16E-FY17E earnings forecast. Sales growth likely to taper off in 4Q16 but earnings should continue to improve thanks to the price increase introduced. Upgrade to MARKET PERFORM with unchanged TP of RM8.04 on lower downside risk following 20% YTD dip in share price.

Result within expectation. 9M16 net profit of RM43.1m (-26.7% YoY) was within our expectation by accounting for 76.7% of our forecast. Consensus comparison is not available as the stock is not widely tracked. As expected, third interim DPS of 5.0 sen was declared, lifting 9M16 DPS to 15.0 sen (vs 9M15: 30.0 sen), which was also in line with our expectation.

YoY, 9M16 revenue grew 11.3% to RM836.5m thanks to positive sales momentum driven by 40th anniversary sales and marketing programmes as well as a price increase by an average of 9.3%. The price increase was carried out in two stages in Feb 2016 and April 2016 while the pre-price increase buying has also contributed to the top line growth. 9M16 gross profit only inched up by 6.4% to RM203.7m as gross margin narrowed by 1.1ppt due to higher import costs on the back of a weaker MYR. Meanwhile, 9M16 PBT was 26.9% lower at RM58.4m due to higher operating expenses and incentive arising from the 40th anniversary programmes. As a result, 9M16 net profit fell 26.7% to RM43.1m.

QoQ, 3Q16 revenue declined marginally by 2.7% as 2Q16 was aided by pre-price increase buy-up. However, 3Q16 net profit was 0.1% higher at RM65.6m as gross margin expanded 0.7ppt to reflect the impact of the price increase. 3Q16 PBT jumped 137.4% to RM23.6m attributable to the swing in marketing expenses recognition. As a result, 3Q16 net profit more than doubled (+206.1%) to RM18.9m.

Cautiously optimistic. Moving forward, the sales growth momentum is likely to taper off in 4Q16 as the encouraging sales growth of 11.3% in 9M16 was partially aided by the pre-price increase stocking up. However, we still expect the revenue to stay above RM1b level in view of the marketing efforts the Group has invested in conjunction with the anniversary. Earnings should continue to improve thanks to the price increase that was introduced as thus we are cautiously optimistic on the near-term earnings outlook.

Earnings forecast unchanged. We made no changes to our earnings forecasts.

Upgrade to MARKET PERFORM from UNDERPERFORM with unchanged Target Price of RM8.04. We raised our rating as the downside risks are subsiding following YTD share price dip of 20%. Our unchanged TP of RM8.04 is based on unchanged 19x PER FY17E, which is in line with -0.5 SD over the 5-year mean. We believed that the market has factored in the downfall in earnings as well as dividend. The recent sharp depreciation of MYR against USD may have raised concern on the middle term outlook of the company, but it could have been overplayed as we believe that the company can be able to pass on the additional costs even if the forex turn unfavourable and the impact is too much for it to bear in view of its strong brand name and steady distributor base.

Source: Kenanga Research - 17 Nov 2016