1H17 net profit of RM392.5m (-4% YoY) was broadly within estimates. A 70.0 sen interim dividend declared was also within estimates. Despite threats of higher production costs, earnings should be supported by continuous product innovation driving sales and better operational efficiency that could translate into better cost savings. Maintain MARKET PERFORM and TP of RM83.90.

1H17 net profit broadly within expectations. 1H17 net profit of RM392.5m was broadly within expectations, accounting for 58%/59% of our/consensus estimates. We are expecting a weaker 2H17 on slower post-seasonality demand. An interim dividend of 70.0 sen was declared, which is also within expectation. Typically, the group announced most of its dividend payments in 2H17.

YoY, 1H17 sales of RM2.7b grew by 4% due to stronger sales from better performance in the domestic and export markets, driven by effective marketing efforts directed towards the festive seasons in 2Q17 and commendable reception of new products in both markets. Gross profit saw a 3% decline, likely due to higher unfavorable forex exposures towards imported commodities (i.e. indicative average USD/MYR: 1H16 of RM4.10/USD vs 1H17 of RM4.39 /USD). Nonetheless, effective cost management strategies adopted by the group since late FY16 supported PBT to register flattish growth at RM503.3m (<1%). 1H17 closed with a 4% lower net profit following a higher effective tax rate of 22.0% (+3.9 pts).

QoQ, 2Q17 revenue of RM1.3b recorded a 6% decline in conjunction with the softer demand during the fasting season. Gross profits also appear to be thinning to RM469.9m (-14%) possibly due to the higher forex impact from raw materials on production costs. PBT further declined by 27% to RM212.5m as heavy marketing expenses were expected to be incurred to stimulate weaker consumer spending during this period, in comparison to 1Q17 where consumer expenditure was more vibrant with the Chinese New Year season. 2Q17 net profit registered at RM162.1m (-30%) with higher effective taxes of 23.7% (+3.0 pts).

Sideways from here? Despite presumably weaker consumer sentiment, the group continues to demonstrate growth prospects thanks to new product innovations to stimulate market appetite. While the average forex trend could further challenge profitability in the short term, the group’s earlier investment to improve its cost management controls could keep margins sustainable. Henceforth, we believe the group is well grounded to strongly benefit from a potential turnaround in consumer spending and/or commodity prices.

Maintain MARKET PERFORM with an unchanged TP of RM83.90. Our valuation is based on an unchanged PER of 28.0x on FY18E EPS in line with the +0.5 SD over its 5-year mean PER. We maintain our earnings estimates as we had accounted for the group’s growth potential to be suppressed by the prevailing softness in consumer sentiment, which has lingered below “optimistic” levels since Sep 2014.

Source: Kenanga Research - 22 Aug 2017