FY16 core net profit of RM205.0m (-10%) was below expectations on continuing losses from Sri Lanka operations and higher-than-expected tax provisions. YTD dividend of 72.0 sen was within expectations. While we expect improvements from the resumption of the Sri Lanka operations and stronger exports, we cut our earnings to tone down our overly optimistic volume growth assumptions previously. Downgrade to UNDERPERFORM with a lower TP of RM13.44.

FY16 was below expectations. FY16 core net profit of RM205.0m was below expectations, making up of 91%/89% of our/consensus forecasts due to greater-than-expected losses from the group’s associate and group level tax provisions. YTD dividend of 72.0 sen (67.0 sen declared in this quarter) was within expectations.

YoY, 12M16 revenue of RM1679.5m was flattish (+1% YoY). Excluding the loss of revenue arising from the sale of Luen Heng F&B Sdn Bhd in May 2015, we gather the group would have registered a 6% organic sales growth in FY16 with sales expansion from higher selling prices and increase in exports. The group then registered a PBT of RM283.8m (-4% YoY) due to associate losses of RM5.1m (vs. RM16.1m profit in FY15) from Lion Brewery (Ceylon) PLC in relation to the flood which closed operations in Sri Lanka. Along with higher group level tax provisions as a result of under provision in FY15, the group recorded a FY16 core net profit of RM205.0m (-10% YoY).

QoQ, 4Q16 top-line improved by 11% to RM434.6m with stronger sales in both Malaysian and Singapore market, likely due to the year- end festivities and forward buying from an early Chinese New Year season in 2017. PBT numbers also grew significantly to RM81.2m (+40% QoQ) carried by the stronger sales and higher marketing expenses incurred in 3Q16. However, owing to the higher tax provisions and losses from Sri Lanka of RM3.2m during the quarter, 4Q16 core net profit of RM47.1m only registered a 8% growth.

Outlook to improve, even if slightly. The drag in group earnings from losses incurred from Sri Lanka operations is likely to cease as operations have resumed after being temporarily shut down in 2016 due to floods. However, earnings contributions may not be at its full potential immediately as before the flood as production levels have to pick up progressively to its optimal capacity and efficiency. In addition, the progressive growth in the Singapore market may indicate more concentrated effort by the group to expand its share in that market while also benefiting from better currency gains.

On the new Price Control and Anti-Profiteering Regulation 2016, we gathered that the group may withhold any decisions to increase prices in the near term, having already done so twice in 2016 in lieu of higher excise duties. However, given the inelastic nature of the group’s products, some degree of price increase may not be detrimental to overall sales volumes despite the soft market outlook.

We cut our earnings for FY17E by 7% to adjust for our overly optimistic volume growth assumption previously in both Malaysia and Singapore markets. In addition, we introduce our estimates for FY18.

Downgrade to UNDERPERFORM with a lower Target Price of RM13.44 (from RM14.30, previously). Our call downgrade is in conjunction with the recent buying rally of the stock during the month, surpassing our target price, which is based on FY17E revised EPS of 76.4 sen on our unchanged PER of 17.6x (in line with the stock’s 3- year mean PER).

Source: Kenanga Research - 22 Feb 2017