FY17 PATAMI (+2%) was slightly below our estimates but within consensus. A total YTD dividend of 7.25 sen was above expectations, exceeding historical pay-out ratios. Earnings prospect should remain intact in its marine products and livestock segments, but better results from group palm oil segment may be short-lived from potential CPO price corrections. Maintain UNDERPERFORM but reduce our TP to RM4.30 as we trim our FY18E earnings.

FY17 slightly below expectations. FY17 PATAMI was slightly below our expectations but came within consensus numbers, making up of 94% and 96% of the respective full-year estimates as we expected stronger earnings from all segments. A 4.2% interim dividend was declared for a total YTD dividend of 7.25 sen. This was above our expectations as we had only anticipated a full-year dividend payment of 5.5 sen based on an expected c.30% payout ratio which was a historical 3-year average for the group.

YoY, 12M17 revenue of RM3.0b expanded by 6% stemming from better performances across all business segments. PBT growth also trailed closely with 5% growth to RM260.5m, a cumulative result from: (i) the decline in marine products contribution (-13%) from lower mix of surimi and fishmeal sales, which commanded stronger margins; (ii) stronger palm oil earnings (+>100%) with the recovery in CPO prices; and (iii) better livestock segment results (+24%) driven by higher profits from the group’s Vietnam poultry unit and Indonesian feedmill unit. After accounting for higher effective taxes, core PATAMI numbers closed at RM195.9 (+2%).

QoQ, 4Q17 topline of RM813.7m was flattish at 2% growth arising from poorer marine product sales (-7%) but supported by stronger palm oil (+16%) and livestock (+4%) sales. On PBT terms, 4Q17 PBT of RM61.6m fell by 18%, primarily due to weaker marine product contributions by 47% as lower fish catch led to less favourable product mix. The palm oil segment had a better performance (+18%) due to the recovery in CPO prices and higher output from its Indonesian and Sabah operations of which its livestock activities (+31%) benefited from higher earnings from its overseas facilities.

Steady does it. While concerns may surface on the marine products manufacturing segment’s eroding margins from the continuous decline in fish catches, we believe the resilient demand for its product will continue to keep its contributions intact alongside favourable forex exposures from its exports. On the palm oil businesses, while the upward shift in CPO prices may have brightened segmental prospects, current levels may be unsustainable as industry production ramps up in the later part of the year, potentially bringing prices to a correction. Additionally, the livestock segment appears to strive with its overseas operations having a broader market base and cheaper production costs. Meanwhile, the venture into the convenience chain business continues to be promising but may not contribute significantly to the group in the short-term (with ten existing stores operational).

Post results, we trim our FY18E earnings assumptions by c.7% as we move towards more conservative performance across all segments. Additionally, we introduce our FY19E numbers.

Maintain UNDERPERFORM with a lower TP of RM4.30 (from RM4.34, previously), on the back of a weaker FY18E earnings with a revised 25.0x PER (from 23.5x PER), as we relook into the stock’s 5-year mean PER at +0.5 SD. While the group presents strong fundamentals, we believe most of the positives may have already been priced in from its rich valuations. In addition, the added liquidity from the proposed 3:10 bonus issue may further stretch the stock’s valuation where it is now trading at 25.8x PER on FY18E EPS.

Source: Kenanga Research - 30 May 2017