FY16 net profit of RM637.1m (+8% YoY) was below our/consensus expectations due to overly optimistic sales growth projection and higher-than-expected operating expenses. YTD dividend 270.0 sen declared was within expectations. While we made no changes for now pending further details from today?s briefing, we are negatively bias as the prevailing weakness in market sentiment and heavy investments in brand building may justify a toning down of net earnings growth estimates.

FY16 net profit below expectations. FY16 net profit of RM637.1m was below expectations, making up of 92%/93% of our/consensus estimates. The negative deviation is the result of overly optimistic sales growth projections coupled with higher-than-expected operating expenses, likely driven by aggressive marketing activities. A final dividend of 130.0 sen was declared for a full-year pay-out of 270.0 sen, which is in line with our full-year estimate of 275.4 sen.

YoY, FY16 revenue of RM5.1b grew by 5% from better performance in both domestic and export markets on the back of receptive product developments and effective marketing initiatives. Gross profit registered at RM2.0b (+7% YoY) with the support of favourable commodity prices as well as better operating and production efficiency, expanding gross margins to 39.4% (+0.8 pts YoY). Group PBT of RM766.5m saw slimmer growth at 5% as the group continued to pump additional resources to strengthen its market share. With the above, net earnings registered at RM637.1m (+8% YoY) with the assistance of lower effective taxes this year (FY16: 16.9% from FY15: 18.8%).

QoQ, 4Q16 top-line of RM1.2b registered flattish decline (-1% QoQ) likely due to seasonality factors. However, gross profit dipped by 7% to RM457.6m with the normalisation of commodity prices likely to bump production costs (indicative milk powder prices have risen by c.20% from Sep 2016 to Dec 2016. Source: Global Dairy Trade). PBT further declined, by 56% as heavier marketing expenses were incurred in anticipation of Chinese New Year festivities in 1Q17. 4Q16 net profit registered at RM66.9m (-58%).

Well-positioned but let?s be wary. Going forward, while the group may begin to see growing pressure from normalising commodity prices, we believe any net impact to the group?s earnings may be mitigated by its more efficient production methods and improved supply chain. Following this, we are cautiously optimistic with the group?s recent intensive marketing efforts that may not be as fruitful as intended, given the persistent softness in the consumer segment. Nonetheless, we feel that any decline may be unlikely in the short to medium-term given the strong brand name established by the group.

Maintain MARKET PERFORM with an unchanged TP of RM82.10. While we leave our FY17 earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could see downside bias. Our TP is based on unchanged 27.1x FY17E EPS, which is in line with +0.5 SD over 5- year mean. Risks to our call include: (i) weaker-than-expected sales, (ii) unfavourable commodity prices, and (iii) higher-than-expected operating costs.

Source: Kenanga Research - 01 Mar 2017