1H18 PATAMI of RM102.0m (+10%) and absence of dividends were within expectations. Going forward, the palm oil activities (POA) segment with better production rates and higher CPO prices, and integrated livestock farming (ILF) segment with strong foreign demand are seen driving group earnings growth, offsetting the relatively weak marine product manufacturing (MPM) segment. Reiterate MARKET PERFORM and TP of RM3.78.

1H18 within expectations. 1H18 PATAMI of RM102.0m (+10%) is within our/consensus estimates, making up of 47% of both full-year forecasts. No dividend was announced, as expected. The group typically pays a single interim dividend annually, expected to be 4.0 sen for FY18.

YoY, 1H18 revenue of RM1.6b grew by 13% from stronger POA and ILF sales (+c.20%). Revenue from the primary MPM segment was stagnant YoY. The group PBT declined by 2%, dragged by poorer MPM yield (-15%) owing to unfavourable weather conditions. This was supported by better POA contribution on higher FFB production and CPO prices and growth in ILF sales volumes derived from Indonesian market. On the flipside, 1H18 PATAMI registered at RM102.0m (+10%) following tax incentives, which drove the effective tax rate to 12.4% (- 8.9ppt). We believe this is due to the group’s heavy capex spent to expand its MPM and ILF facilities.

QoQ, 2Q18 top-line was higher by 4%, mainly led by better ILF contribution (+15%) thanks to growing Indonesian demand while MPM sales was flattish (+1%). This was dampened by a 33% decline in POA performance from lower QoQ CPO prices and FFB output. At the meantime, PBT grew by 41%. Similarly, this was led by highly favourable ILF results on the back of solid earnings from foreign units, while the POA segment saw weaker margins as explained above.

Slow and steady. We are still optimistic on the group’s longer term growth prospects given the initiatives already set to motion. This includes: (i) enhancing its marine deep-sea fishing fleet and frozen seafood processing competencies, (ii) investing into larger feed mill and poultry production, and (iii) expanding the FamilyMart convenience store chain. In the shorter-term, a large profile of the group’s palm oil plantation has achieved maturity and is set to contribute more favourably to the segment, barring any significant retracements on CPO prices. We also believe that the group’s livestock segment may dethrone the marine segment as the primary contributor of group earnings in view of: (i) prolonged harsh weather conditions affecting marine product yields, and (ii) increasing livestock production alongside encouraging demand from the group’s foreign footprints (i.e. Indonesia, Vietnam).

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

Reiterate MARKET PERFORM and TP of RM3.78. Our valuation is based on an unchanged 27.0x FY19E PER, which is in line with the stock’s 3-year mean at +0.5 SD. While the group presents strong fundamentals, we believe most of the positives may have already been priced into its rich valuations. Further, the low dividend prospects may cause yield-seeking investors to look elsewhere.

Source: Kenanga Research - 28 Nov 2017