Post management meeting, we came out feeling reassured by the long-term strategies for the group’s key operations. Efforts to increase production capabilities in the MPM and ILF segment, higher POA estate maturity profile and expanding FamilyMart store portfolio should support growth in the medium-term. Upgrade to MARKET PERFORM with a higher TP of RM4.70 as we tweak our earnings and ascribe a higher 27.0x FY18E PER.

Larger MPM facilities inbound. In expanding its surimi-based product manufacturing capabilities, the group aims to complete the construction of new production plants in its Hutan Melintang base by end-FY18 to boost capacity by 35k mt/year. Towards a longer 5-year horizon, there are intentions of enlarging the group’s deep-sea fishing fleet by c.50% while also enhancing frozen seafood processing and distribution competencies.

POA bearing more fruit. Recall that c.90% of the group’s existing upstream plantation is located in Tarakan, Indonesia. Management expressed that as of FY16, c.45% of its Indonesian estate was already at maturity stage with higher levels of fresh fruit bunch (FFB) production reflected in recent FY17 POA sales (+15% YoY), further benefiting from recovery in CPO prices. Given the existing maturity profile, FFB unit production could improve by c.40% in FY18.

Improving sustainability of ILF operations. The group has poultry ILF operations in East and West Malaysia, Vietnam and Indonesia, which are self-sustaining within their respective locations due to health and logistical limitations. Predominantly involved in the selling and distribution of eggs, the segment has been primarily affected by fluctuations in geographical egg prices. To support margins, plans are in place to construct feed mills in East Malaysia and Kuching, of which excess productions are sold in the market. To back the vibrant demand for eggs in Vietnam, the group intends to upgrade its layering capacity to improve daily production by c.30% by FY18.

More FamilyMarts welcomed. A milestone has been set to establish 300 stores in 5 years. As of this report, 12 stores have opened in conjunction with the 30 total stores target set for FY18. While a fair proportion of outlet offerings consists of fresh house brand foods, management is confident that it is able to keep up with its expanding store portfolio given the currently underutilised capacity of its in-house central kitchen.

Solid plans for solid growth? We commend the continuous initiatives to enhance operational strengths and market base. In an increasingly challenging economic landscape and uncertain market sentiment, the need to reduce dependency on a single segment or market is vital for the group. While management is positive with its abovementioned plans, we hold our conservative view on the growth potential as higher production capabilities may not translate to higher demand in the near term. Nonetheless, we believe the group is wellrooted to stay as a prominent market player in the long term.

Post meeting, we adjust our FY18E/FY19E earnings marginally higher by 1%/2% on slightly higher assumptions for the ILF and POA segments while toning down expectations on the MPM segment.

Upgrade to MARKET PERFORM with a higher TP of RM4.70 (from RM4.30, previously). We revise our applied valuation from ascribing the stock’s 5-year mean PER at +0.5SD of 25.0x in favour of a 3-year mean PER at +0.5SD of 27.0x. We believe this adjustment is fair as the more recent developments should be more reflective as the group extends to broader markets with new operations (i.e. convenience store chain business). We derive our new TP on a 27.0x PER against a revised FY18E EPS of 17.3 sen.A recap on FY17 results. 12M17 registered a PBT of RM260.5m (+4% YoY) on: (i) favourable CPO prices and fruit yields improved POA contributions, and (ii) stronger ILF results from higher product demand from Vietnam and Indonesia though offset by weaker MPM contribution from declining catch rates that led to declining margins despite higher export sales. While shareholders were rewarded with a higher 7.25 sen dividend pay-out (or c.45% ratio) in FY17, we believe expectations should normalise to an historical average of c.30% pay-out ratio as the higher payment was given in conjunction with the Group’s 30th anniversary.

Source: Kenanga Research - 7 Jun 2017