We attended HEIM’s 1H17 results’ briefing yesterday. While feeling reassured with management’s initiatives in improving group operational performance to minimise cost, we expect weaker sales for the remaining of the year to drag earnings prospects. Reiterate OUTPERFORM call but reduce our TP to RM19.30 (from RM21.38, previously) as we cut our FY17E/FY18E net profit estimates by 11%/10%.

Sluggish consumer sentiment. To recap, 1H17 revenue declined by 12% against 1H16. While the higher base in the prior year was driven by the anticipation of a price increase in July 2016, 2Q17 performance was flattish against the seasonally weaker 1Q17 due to an earlier Chinese New Year (CNY) celebration. We believe this to be a result of weaker consumer sentiment, which underpinned the sales volumes of the lesser premium brands that have a larger customer base due to their affordability. However, management attributed newly launched premium brands as supporting YTD sales, which is expected to perform favourably thanks to their growing reception and stickier demand from existing customers.

Greater strive on more efficient operations. The group’s ongoing initiative to streamline operational processes has shown promising results. The initiative includes implementing more effective production and procurement methods, greater traceability on sales front performance and better synergy with distributors. To recap, 1H17 operating margins improved to 18.1% against 16.4% in 1H16. The stronger margins led 1H17 net earnings to only decline by 1% to RM110.6m despite the 12% decline in top-line numbers.

Working towards a better year-end. Management views the soft market to be caused by the rising costs of living, which partly leads to higher demand for less costly contrabands. As the matter has been a recurring long-term concern, the group has been working closely with the regulatory bodies to curb illegal trades as it also cannibalise tax revenues on alcohol products. On the shorter term and in view of the later CNY season in 2018 which may affect year-end sales, the group did not discount the proposal to invest more in marketing and promotional activities to stimulate demand during the 2H17 period. We believe that this may come in the form of further product launches in the premium segment as it appears to be the most sustainable and provides the best returns to the group. However, concerns abound if sales volumes on the lesser premium segment continue to diminish as we believe they account for a larger portion of the group’s portfolio. Still, as we see progressive improvement on group processes, we do not discount the likelihood of operating margins expanding further in the short term.

Post-briefing, we cut our FY17E/FY18E earnings estimates by 11%/10% mainly attributed by weaker sales assumptions for 2H17. However, we expect better net margins going forward, derived through improving cost savings from the group’s operational enhancements.

Maintain OUTPERFORM with a lower TP of RM19.30 (from RM21.38, previously). Our new TP is based on our prevailing 19.0x PER on FY18E (which is close to its 5-year mean PER) on a revised EPS of 101.4 sen. Our dividend estimates of 95.0 sen for FY17E remains unchanged as we expect better pay-out in 2H17. This translates to a dividend yield of 5.3% for FY17.

Source: Kenanga Research - 28 Jul 2017