FY17 core net profit of RM398.6m (+5%) and YTD dividend payment of 57.5 sen came above our expectations, but within consensus, due to lower-than-expected operating expenses. While we made no changes for now pending further details from a briefing, we are positively biased on group’s prospects given the potential operational margin expansion and efforts to broaden the group’s export market. Maintain MARKET PERFORM and TP of RM24.95.

FY17 core PATAMI beat our expectations. FY17 core PATAMI of RM398.6m is above our estimate of RM354.4m by 12% but within consensus estimates of RM397.8m. The positive deviation was due to lower-than-expected operating expenses incurred by the group postrestructuring. An interim dividend of 30.5 sen was declared for a YTD dividend payment of 57.5 sen (FY16: 57.5sen). This is also above our 52.0 sen expectation as we had expected for lower dividends on our lower earnings estimates.

YoY, FY17 revenue declined marginally by 2% to RM4.1b, as poorer sales registered by F&B Malaysia (-8%) was offset by sales growth from F&B Thailand (+9%). The Malaysian segment suffered from weaker consumer sentiment while the Thai segment enjoyed growth from favourable forex translations and better demand for its dairy based products. Group EBIT fell by 20% to RM345.1m arising from lower contributions from F&B Malaysia (-45%) due to rising input costs while F&B Thailand (+14%) benefited from cheaper raw material and packaging costs. On the back of lower effective tax rates at 8.6% (- 4.4pts), net earnings registered at RM323.3m (-16%). During the year, the group had undergone an internal restructuring exercise to improve efficiency and minimise cost. Reversing this and other one-off items incurred during the year, FY17 core net profit would be at RM398.6m, better than FY16 core net profit of RM379.0m by 5%.

QoQ, 4Q17 revenue declined by 6% on weaker sales from both F&B Malaysia and F&B Thailand on more intense competition in both markets. 4Q17 EBIT declined further by 73% which we believe is partly due to the rise in marketing expense in both segments in anticipation of year-end seasonality. Removing the same one-off items from the above, core net profit during the quarter would come up to RM52.8m (- 35%).

Investments to pay off? As part of the internal restructuring exercise, the group had implemented various operational transformation programs to streamline its supply chain, with the hope of reducing costs and maximising efficiency. While this should eventually lead to better operational margins on the group level, meaningful growth may still be only derived from an uptick in domestic sales, which was underpinned by poor consumer sentiment. This has also offset the stronger contributions from the Thailand segment where its dairy products are enjoying better response. Hence, the group aims to minimise the impact from the tepid Malaysia market by further expanding its export base to countries with more vibrant consumption habits.

Maintain MARKET PERFORM with an unchanged TP of RM24.95. We derive our TP on an ascribed 23.5x PER (5-year average Fwd. PER) on its FY18E earnings per share of 106.1 sen. While we leave our FY17E-FY18E earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could have upside bias. Risks to our call include: (i) weaker-thanexpected sales, (ii) higher-than-expected operating costs, and (iii) unfavourable currency exchange exposure to the group.

Source: Kenanga Research - 8 Nov 2017