FY16 net profit of RM149.1m (+6% YoY) was broadly within expectations. YTD dividend declared of 220.0 sen was within estimates. Going forward, we believe there may be challenges to the group through normalising commodity prices to suppress margins and slower-than- expected recovery in consumer spending. Maintain MARKET PERFORM but trim our TP to RM57.00 following some housekeeping adjustments.

FY16 net profit was broadly within expectations. FY16 net profit of RM149.1m was broadly within expectations, making up of 95% of our full year estimates. YTD dividend of 220.0 sen declared was in line with our full-year dividend estimates.

YoY, FY16 revenue of RM1,047.7m grew by 5% from the recovery in consumer spending and new product launches in 2H16. Gross margin appears to have tipped slightly to 42.4% (+0.4 pts) as the softness of commodity prices continued to move closer to its normalised rate. With the above and investments in brand development and system upgrades to the group, FY16 net profit closed at RM149.1m (+6% YoY).

QoQ, 4Q16 top-line declined by 3% to RM271.7m as a result of the slowing demand for the group?s new products introduced in 3Q16. Gross margins fell to 40.4% (-2.0 pts) as commodity prices have experienced a more prominent recovery in 2H16, thus, affecting the group?s input costs. 4Q16 net profit registered at RM37.8m (-7% QoQ) as it was further dragged down by heavier marketing expenses during the quarter.

Head-on with a challenging outlook. With the apparent recovery in commodity prices, primarily for skimmed milk powder and whole milk powder, we believe the group may have to resort to making the difficult decision of raising product prices to keep earnings afloat. While we believe any revision may still be well within the jurisdiction of the new Price Control and Anti-Profiteering Act 2016, it may be detrimental towards the group?s market share given the prevailing weak state of consumer spending. Alternatively, we believe greater efforts into new product developments with stronger margins and effective marketing may help to keep the group?s position intact.

We trim our FY17E assumptions by 3% following some housekeeping adjustments. In addition, we introduce our FY18E numbers.

Maintain MARKET PERFORM with a lower TP of RM57.00 (from RM58.42, previously). This is based on FY17E revised EPS of 262.6 sen against our unchanged targeted 22.3x PER, which is in line with the 3-year mean. The group has declared a 110.0 sen dividend for FY17. While we maintain our conservative FY17 expected dividends for now, we would not be surprised if the group pay dividends surpassing our expectations for a FY17E dividend yield of >4.4%.

Source: Kenanga Research - 01 Mar 2017