FY17 core net profit of RM60.8m (+16% YoY) was broadly within our expectation but missed consensus estimates. We expect FMCG exports to drive earnings amidst flattish domestic demand. Full-year dividend of 10.0 sen declared was a positive surprise. Maintain MARKET PERFORM with a higher TP of RM2.95 (from RM2.64, previously) as we upgrade our valuation on FY18E earnings, ascribing a premium for the group’s increasing export exposure.

FY17 core earnings within expectations. FY17 core net profit of RM60.8m was broadly within our expectation but below consensus, making up 95% and 93% of the respective estimates. We believe the negative deviation on consensus numbers were due to overly optimistic margin assumptions from the group’s growing FMCG exposure. An interim dividend of 1.0 sen with a special dividend of 3.0 sen was declared, for a YTD dividend of 10.0 sen. The total dividend payments were above our 6.0 sen expectations we had not anticipated the group to declare payments more than twice a year.

YoY, FY17 sales of RM425.2m grew 8% on the back of better FMCG performance (+17%) which was led by higher exports to China. The Café Chain segment continued to demonstrate a flattish decline (<2%). However, this indicates an increase in same-store-sales as the group streamlined its operations to 234 stores against 244 stores in FY16. PBT increased by 18% to RM80.2m with stronger margins of 18.9% (+1.6 pts) thanks to larger contributions and better forex gains from the FMCG segment which commands more favourable margins. FY17 core net profit closed at RM60.8m (+16%).

QoQ, 4Q17 revenue declined by 8% due to softness in both Café Chain (-3%) and FMCG (-11%) segments. We believe FMCG sales were dragged by seasonality as demand in the China market is less paced during the Chinese New Year festivities. On the PBT level, 4Q17 fell 60% largely due to higher provisions of overdue trade receivables on the Café Chain segment while the FMCG segment incurred higher distribution and selling expenses from seasonality. As such, 4Q17 core earnings declined by 59% to RM9.9m.

Outlook to stay optimistic? While sales numbers on the group’s cafés have been relatively stagnant, the group’s strategy to streamline its outlet profile may lead to better margins prospects in the near future. In addition, the brand penetration into newer regions will expand the group’s presence and may further supplement its FMCG distribution networks. We continue to believe that exports will be the key driver to the group’s earnings given flattish domestic FMCG sales outlook and Café Chain performance, hence further encourage efforts towards expanding its export capabilities.

Post-model updates, we tweak our FY18E earnings by -1.0% to adjust for a slightly larger tax exposure. We also increase our dividend estimates for FY18E to 11.0 sen from 9.0 sen as the group appears to be practicing a consistent payout ratio of at least 70% of net earnings. Meanwhile, we introduce our numbers for FY19E.

Maintain MARKET PERFORM with a higher TP of RM2.95 (from RM2.64, previously). Our new target price is based on an increased 18.0x FYE PER (from 16.0x, previously). We increase our valuation on the basis of the stock’s increasing export exposure, which we believe justifies a premium. The new valuation is closely in line with the stock’s +2SD over its 3 year forward average PER. We believe the increase is supported by the similar premium ascribed by the market to other FMCG players such as KAWAN, PWROOT and SPRITZER.

Source: Kenanga Research - 26 May 2017