FY17 results were below estimates due to higher-thanexpected effective tax. YTD dividend of 10.0 sen was broadly in line with our expectations. Going forward, while domestic sales may continue to show softness amidst weak consumer sentiment, group earnings should be driven by the vibrant MENA export market. Maintain OUTPERFORM and TP of RM2.90.

Heftier tax exposure. FY17 PATAMI of RM43.5m is below our expectation, making up 90% of our full-year estimate mainly due to higher-than-expected effective tax. Our PBT estimate of RM55.6m was closely in-line with the reported RM54.8m. An interim 2.5 sen dividend was declared for a YTD total dividend of 10.0 sen, which is broadly in line with our 11.0 sen expectation.

YoY, 12M17 sales of RM399.7m expanded by 9% overall, with the decline in domestic sales (-4%) offset by stronger performance from the export market (+28%). However, core EBITDA only improved by 5%, likely due to rising commodity prices driving production costs. As compared to FY16, which saw a tax gain of RM0.8m, FY17 was pressured by an effective tax of 13.8% resulting in net earnings of RM47.2m (+4%).

QoQ, 4Q17 revenue was weaker by 11% against 3Q17 as domestic sales and exports fell by 15% and 6%, respectively. We reckon the poorer domestic sales could be due to a certain degree of forward buying from the early Chinese New Year festivities while exports were lower due to some easing of demand from the MENA region. While operating profit margin was consistent, net profit in 4Q17 was reduced by 24% from higher effective tax (+13.0 percentage points to 25.2%).

Sentiment unchanged. While the group continue to stand on shaky ground with domestic consumers, its export markets should continue to shine optimism on the group’s earnings prospects with the current fullyear numbers showing a solid 28% growth rate. While the construction of the UAE plant may only be completed in 2019, we are hopeful that its market share will continue to expand from resilient demand, backed by the MENA region’s higher population base as well as higher standard of living. While net earnings results may have disappointed our forecast for the year, we believe the higher tax rates in the last quarter will normalise in FY18 on expectations of higher capex outlays.

Post results, we adjust our FY18E earnings marginally by 0.8% for housekeeping as we incorporate FY17 numbers. In addition, we introduce our FY19 estimates.

Maintain OUTPERFORM with an unchanged TP of RM2.90. Our TP is based on the ascribed 17.0x PER on FY18E earnings per share of 17.0 sen, representing +2SD-level above the stocks 2-year average Fwd. PER. We believe a higher valuation premium should be ascribed on this stock given the increase in export exposure. At the current price point, the stock commands a strong potential dividend yield of 4.7%/5.1% in FY18/FY19, based on an estimated 70% pay-out ratio.

Source: Kenanga Research - 31 May 2017