1Q18 core net profit of RM16.8m (+21% YoY) was within our and consensus estimates. No dividend was declared, as expected. The streamlining of café chain outlets appears to be bearing fruit as same-store-sales are improving against a lower store base while the FMCG segment is likely to continue benefiting from growing popularity in the export market. Maintain OUTPERFORM with a higher TP of RM3.15 as we roll over our valuation base year to FY19E.

1Q18 core earnings within expectations. 1Q18 core net profit of RM16.8m was within our/consensus estimates, accounting for 23%/24% of the respective full-year expectations. No dividend was declared, as expected.

YoY, 1Q18 sales of RM109.3m grew by 6%, stemming from the commendable 11% growth in FMCG sales where the Greater China market continued to dominate in export demand. Although the café chain segment sales growth appears idle, it registered an increase in same-store-sales on a portfolio of lower but better performing store base (i.e. 1Q18: 231 stores vs 1Q17: 240 stores). However, group PBT rose by 11% to RM21.9m only as a result of write back of provisions in the café chain segment. FMCG PBT contributions saw an immaterial decline following higher operating expenses within the segment. 1Q18 PATAMI closed at RM16.8m (+21%) after incurring lower taxes.

QoQ, 1Q17 revenue grew marginally by 2% arising from better export driven FMCG sales amidst lower café chain revenues, possibly due to the softer spending during the fasting season. PBT-wise, group level registered a 74% growth as 4Q17 was affected by year-end debt provisions and more costly distribution expenses. 1Q18 core PATAMI closed with a 69% growth.

Earnings driver on the foreign front. We continue to believe that exports will be the key driver to the group’s earnings given flattish domestic FMCG sales outlook and Café Chain performance; hence further encouraging efforts towards expanding its export capabilities. Furthermore, while sales numbers on the group’s cafés have been relatively stagnant, the group’s strategy to streamline its outlet profile may lead to better margins prospects in the near future. The group is also seen to capitalize on its brand equity in foreign markets to expand its café chain presence there, as recently seen with the licensee agreements executed in Shanghai which we believe could translate to exponential growth in both segments going forward.

Post results, we maintain our FY18E/FY19E earnings assumptions.

Maintain OUTPERFORM with a higher TP of RM3.15 (from RM3.00, previously), as we roll over our valuation base year to FY19E on an unchanged 18.0x PER (in line with the stock’s +2SD over its 3-year forward average PER). We believe the increase is supported by similar premium ascribed by the market to other FMCG players such as KAWAN, PWROOT and SPRITZER. Furthermore, the group’s expanding export market demand reduces dependence on the domestic market which has been hampered by poor consumer sentiment and spending habits.

Source: Kenanga Research - 25 Aug 2017