1Q18 core PATAMI (-48%) is below estimates, impacted by higher raw material and marketing costs. 4.0 sen dividend announced was within estimates. Despite poorer results, we believe group earnings could benefit in the coming quarters with an improvement in commodity prices and marketing initiatives as they had historically managed to secure better sales despite poor seasonality. Maintain OUTPERFORM with a lower TP of RM2.70, from RM2.90 previously.

Below expectations. While 1Q18 topline of RM109.2m is within our expectations, core PATAMI of RM3.9m is below, accounting for 8% of our full-year estimates. The negative deviation was due to higher-thanexpected marketing expenses incurred alongside expanding pressure from commodity prices. An interim 4.0 sen dividend was announced, within our estimates.

YoY, 1Q18 sales of RM109.2m grew by 4%, derived from a decrease in domestic sales (-5%) mitigated by better export sales (+17%). However, adjusted EBITDA performance declined by 65% to RM5.8m with lower margins at 5.3% (-10.3 pts) due to unfavourable commodity pricing (i.e. coffee and sugar) and higher marketing expenses incurred during the quarter from more aggressive advertising in the Middle East. Thanks to lower effective taxes from deferred tax income exposure, 1Q18 closed with a core PATAMI of RM3.9m (-48%).

QoQ, 1Q18 revenue improved by 19% against 4Q17 on the back of better sales in both the domestic and foreign regions, likely to be driven by the stronger marketing initiatives, reflected in the increase operating expenses. While operating profit declined by 60%, core earnings declined by 50% due to higher tax expenses incurred during the previous quarter.

Stronger sales clouded by higher costs. Despite a supposedly seasonally weaker quarter with the fasting period in conjunction with the Hari Raya festivities, demand for group products proved resilient in both markets likely due to the widening of consumer outreach achieved. While this comes at a price of higher marketing spend, the group could potentially secure a loyal customer base which may further translate to better performances in the near future. However, the strategy appears untimely with the industry-wide higher average commodity costs. While we believe lower production costs could be expected in the coming quarters, given the easing price trends, we believe the group may still be aggressive with its marketing efforts to stimulate the soft domestic consumer market.

Post results, while we slightly improve our sales growth estimates for FY18E/FY19E, we revise our net earnings estimates by 12.9%/11.7% as we apply more conservative margins assumptions from the above.

Maintain OUTPERFORM with a lower TP of RM2.70 (from RM2.90, previously). Our new TP is derived from a roll-over base year to FY19E with its revised 15.8 sen EPS against an unchanged 17.0x PER (+2SDlevel above the stocks 2-year average Fwd. PER). Although we have trimmed our TP, we believe the stock could be well positioned to benefit from a turnaround in consumer spending as it is still capable of registering growth on “pessimistic” sentiment levels. The stock still commands a strong potential yield of 5.9%/6.3% in FY18E/FY19E as we leave our dividend estimates unchanged.

Source: Kenanga Research - 30 Aug 2017