1Q17 net profit of RM9.5m (-47.6% YoY) came in below our expectation (at 12.7% of forecast) due to weaker-than expected sales. First interim DPS of 5.0sen was declared, came in below expectation. Post results, we have trimmed our FY17E/FY18E earnings assumptions by 19.6%/9.1% on expectations of weaker sales and higher import costs. Downgrade to MARKET PERFORM from OUTPERFORM with a lower TP of RM8.17 (from RM8.98, previously).

Below expectation. 1Q17 net profit of RM9.5m (-47.6% YoY) came in 12.7% below our forecast. Consensus comparison is not available due to lack of coverage. The poorer-than-expected set of results was due to weaker-than expected sales and strong purchases in 1Q16 ahead of the price increase effective February and April 2016 (at an average of 9.3%). First interim DPS of 5.0 sen was declared (1Q16: 5.0 sen), and was below expectation.

YoY, 1Q17 revenue declined by 22.5% to RM237.2m, due to higher sales base in 1Q16 from pre-price hike purchases, as well as lower sales momentum due to lack of incentives and marketing programmes. 1Q17 gross profit declined by 22.4% to RM56.4m due to higher import costs on the back of a weaker MYR against USD. Additionally, higher effective tax rate of 29.0% (1Q16:27.4%) further reduced 1Q17 net profit by 47.6% to RM9.5m.

QoQ, 1Q17 revenue declined by 5.5% to RM237.2m, due to further consolidation following the conclusion of ABO’s Performance Year 2016, and 40th Anniversary programmes. 1Q17 PBT declined by 8.8% to RM13.3m from lower sales and higher import costs as a result of a weaker MYR against USD. Meanwhile, higher effective tax rate of 29.0% (4Q16: 21.2%) further trimmed net profit growth to 17.8% and net profit to RM9.5m.

Lacking of incentives and marketing programmes. With the conclusion of ABO’s Performance Year 2016 and 40th Anniversary programmes, the sales momentum is expected to slow down mainly due to lack of incentives and marketing programmes, along with weak consumer sentiment and economic headwinds. Additionally, the recent strengthening of the MYR against USD is still insufficient to cushion the negative effects of the group’s business. Moving forward, we believe the group will be able to overcome the challenges by encouraging its distributors with new sales incentives, organising a more aggressive marketing and sales programmes, and new product launches to counter the weak consumer sentiment.

Post-results, we trim our FY17E/FY18E earnings assumptions by 19.6%/9.1% on expectations of weaker sales and higher import costs. As such, we lowered our Target Price to RM8.17 (from RM8.98, previously) based on an unchanged 19x FY18E EPS, which is -0.5 SD below the 5-year mean. Downgrade to MARKET PERFORM call (from OUTPERFORM call previously).

Source: Kenanga Research - 18 May 2017