9M17 reported PATAMI of RM32m (-31% YoY) came in at 49%/53% of our/consensus full-year forecasts. Excluding the provision for inventories (RM2.1m) and receivables (RM6.8m), 9M17 core PATAMI of RM40.9m (-18% YoY) came in below expectations at 62%/68% of our/consensus fullyear forecast. The negative variance was due to higherthan-expected operating cost. We downgrade our FY17 and FY18 earnings forecasts by 13%. Correspondingly, our TP is cut from RM3.80 to RM3.30 based on an unchanged 14.5x FY18E revised EPS (-1.0 SD below 5-year historical forward mean). Reiterate UNDERPERFORM.

Result Highlights. QoQ, 3Q17 revenue rose 11% due to double-digit growth from both the concession business and Indonesian operations. Correspondingly, 3Q17 Core PBT rose 16% to RM20.6m (excluding the one-off provision for inventories and receivables totalling RM5.1m) due to higher revenue in the manufacturing division and boosted by a 1.0 pp (percentage point) margin expansion to 3%. Specifically, 3Q17 PBT at the manufacturing division was higher by 98% to RM16.2m from a low base effect. However, due to an abnormally higher effective tax rate of 75% (3Q17: 4%), 3Q17 Core PATAMI fell 18% to RM8.9m (stripping out one-off provision and write-off of inventories of RM5.1m). A third single-tier interim DPS of 5.0 sen was declared, which brings 9M17 DPS to 13.0 sen which came in within our expectation.

YoY, 9M17 CORE PATAMI fell 18% to RM40.9m excluding provision for inventories (RM2.1m) and receivables (RM6.8m), no thanks to lower core PBT of RM62m (-13%), primarily due to lower production at the manufacturing facilities on temporary closure of certain manufacturing production lines for preparatory works to facilitate the commercialisation of new products that were approved ahead of schedule. The Indonesian division achieved a PBT of RM3.3m, a turnaround from the deficit of RM3.4m in 9M16. This was mainly attributable to higher contribution because of a production rationalisation exercise as well as reduced finance cost.

Outlook. Although earnings were impacted by the temporary closure of production lines, this will subsequently enable the Group to move forward with the commercialisation of new products as some of the products were approved ahead of schedule. We expect earnings to be lukewarm in subsequent quarters in anticipation of volatile off-take and potentially higher operating expenses. Additionally, the roll-out of PHIS is expected to continue to dampen bottom-line over the short term. The Indonesian operations remain a key area of growth, while further progress are being made in the European Union as the Group seeks to expand global presence. In tandem with this, the Group is focused on implementing continuous cost optimisation measures across its operations. Over the longer term, we expect its manufacturing division to propel earnings growth. The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products. This should boost demand for its products and lift earnings.

Downgrade FY17/FY18 net profits by 13%/13%. We downgrade both our FY17E and FY18E net profits estimates by 13% to take into account the higher-than-expected operating cost.

Reiterate UNDERPERFORM. Correspondingly, our TP is cut from RM3.80 to RM3.30 based on an unchanged 14.5x FY18E EPS (-1.0 SD below 5-year historical forward mean). Reiterate UNDERPERFORM.

Source: Kenanga Research - 16 Nov 2017