1H17 net profit of RM24.2m (0% YoY) came in below our expectation (at 40% of forecast) due to weaker-than expected sales. Post results, we have trimmed our FY17E/FY18E earnings assumptions by 9%/8% on expectations of weaker sales. Maintain MARKET PERFORM with a lower TP of RM7.50 (from RM8.17, previously).

1H17 below expectation. 1H17 net profit of RM24.2m (0% YoY) came in 40% below our forecast due to weaker-than expected sales. Consensus comparison is not available due to lack of coverage. A 5.0 sen interim DPS was declared, bringing YTD DPS to 10.0 sen (1H16: 10.0 sen), which was within expectation.

YoY, 1H17 revenue declined by 15% to RM489.2m, attributed to strong sales base in 1H16 ahead of the price increases (on February and April 2016) and major promotion programmes (40th Anniversary). 1H17 gross profit declined by 16% to RM116.7m due to higher import costs on the back of a weaker MYR against USD in 1Q17. However, lower operating expenses by 20% from lower marketing provisions, and lower effective tax rate of 27% (1H16:30%), cushioned the negative impacts resulting in flattish growth for 1H17 net profit, which registered at RM24.2m.

QoQ, 2Q17 revenue increased by 6% to RM252.1m, due to positive response towards sales and marketing programmes. 2Q17 gross profit increased by 7% to RM60.4m due to lower import costs as a result of stronger MYR against USD (as at 30th June 2017, the USD/MYR at RM 4.2928/USD compared to RM4.4255/USD as at 31st March 2017). Coupled with lower operating expenses by 6% and lower effective tax rate at 26% (1Q17: 29%), net profit increased significantly by 56% to RM14.8m, with improved in net profit margin at 6% (1Q17:4%).

Lacking of incentives and marketing programmes. With the conclusion of ABO’s Performance Year 2016 and 40th Anniversary programmes, the sales momentum is expected to slow down mainly due to lack of incentives and marketing programmes, along with weak consumer sentiment and economic headwinds. However, the recent strengthening of the MYR against USD has improved gross margins attributed to 80% of the group products costs are in USD (as at 30th June 2017, the USD/MYR at RM 4.2928/USD). Moving forward, the group noted that the operating environment for the second half of the year remains challenging due to the softer economic landscape arising from weak sentiment among consumers, while foreign exchange impact continues to exert pressure on the margins. The group will continue to proactively focus on strategies to: (i) effectively manage operating costs to offset pressure on profitability, and (ii) implement various sales and marketing initiatives,

Post-results, we trim our FY17E/FY18E earnings assumptions by 9%/8% on expectations of weaker sales.

Maintain MARKET PERFORM call with a lower Target Price of RM7.50 (from RM8.17, previously). Correspondingly with the earnings cut, we lowered our Target Price to RM7.50 based on an unchanged 19x FY18E EPS, which is below -0.5 SD the 5-year mean. Maintain MARKET PERFORM call.

Source: Kenanga Research - 24 Aug 2017