9M17 NP of RM176.4m (+5%) is deemed broadly within estimates in anticipation of a stronger 4Q17. No dividend was declared as expected. The stronger product portfolio is expected to stimulate demand while better operating efficiency should support bottom-line performance. The recent sell-down presents a buying opportunity with further impetus coming from its decent dividend yields. Upgrade to OUTPERFORM with an unchanged TP of RM19.30.

9M17 net earnings broadly within expectations. 9M17 results of RM176.4m accounts for 67%/63% of our/consensus estimates. We deem this to be broadly within expectations as we anticipate significantly stronger sales in the 4QCY period on peak seasonal demand (due to year-end holidays and New Year celebrations). No dividend was announced during the quarter, as expected.

YoY, 9M17 revenue of RM1.3m grew slightly by 1% compared to 9M16. Sales growth is attributed to new product launches during the quarter (i.e. Apple Fox Cider) but this only led to a marginal YoY gain due to a weaker 1H17 which was impacted by an earlier CNY season. Operating profit, however, expanded by 7% with better margin at 18.4% (+1.1ppt) from improved operational and procurement processes. With a higher effective tax rate of 26.5% (+1.5ppt), 9M17 recorded a net profit of RM176.4m (+5%).

QoQ, 3Q17 revenue grew by 25% to RM509.6m driven by larger market offerings and better product mixes. Despite this, operating profit only grew 17% on a thinner margins of 18.7% (-1.3ppt) owing to the higher marketing spend on new products. Net earnings grew by 7% to RM65.8m dragged by higher effective tax at 30.4% (+7.1ppt).

Building a solid foundation. Ongoing threats from cheaper contrabands are not likely to be alleviated significantly in the near term. In view of this, management’s continued efforts to enhance its brand equity and operating efficiencies bode well to create a sustainable demand for its products. We believe its new brands have done well to balance the group’s product portfolio to cater to a wider market. Recall that the group introduced lower premium beers products in 1H17 to cater to the more price-sensitive consumers. However, to back its products amidst the soft consumer market, we believe aggressive marketing spend will be necessary to stimulate stronger demand and product awareness. The increased marketing spend could be offset by cost savings derived from the group’s recently streamlined operating and cost structure.

Post results, we make no changes to our FY17E/FY18E earnings estimates.

Upgrade to OUTPERFORM with an unchanged TP of RM19.30. Our TP of RM19.30 is based on our prevailing 19.0x PER FY18E (which is close to its 5-year mean PER). The recent sell-down of the stock may be a result of the overall poorer trading sentiment in the market. We believe this presents a buying opportunity for investors as the stock is backed by: (i) decent dividend yield, (ii) strengthening operational margins, and (iii) leading market position.

Source: Kenanga Research - 22 Nov 2017