9M17 net profit of RM18.2m and absence of dividends were within expectations. Short-term challenges persist in the form of: (i) poor consumer sentiment, (ii) high operating costs in China, and (iii) unfavourable PET resin prices. Nonetheless, group’s prospects are backed by the construction of a new automated warehouse which should improve: (i) production capabilities, (ii) efficiency, and (iii) storage facilities. Reiterate MARKET PERFORM call and TP of RM2.20.

9M17 net earnings within expectations. 9M17 NP of RM18.2m is within our expectation, accounting for 79% of our/consensus full-year estimates. We anticipate 4Q17 earnings to normalise following the sporting event-boosted 3Q17 performance. No dividend was announced, as expected. YTD, a dividend of 3.5 sen has been announced so far.

YoY, 9M17 sales of RM234.4m dipped slightly by 2% from RM238.1m in 9M16 due to softer domestic sentiment. We believe this could have led to a down-trading from the premium “Spritzer” brand to the more affordable “Cactus” brand. EBITDA stood at RM36.2m (-5%), likely from greater marketing expenses in conjunction with the 2017 SEA Games. This led EBITDA margin to decline to 15.5% (-0.6ppt). Following higher effective taxes at 30.7% (+4.0ppt), net profit for 9M17 registered at RM18.2m (-10%).

QoQ, 3Q17 sales of RM83.2m was better by 6% thanks to the group’s participation in the recent 2017 SEA Games. EBITDA expanded to RM14.9m (+36%) following efficient operational cost controls which enlarged margins to 17.9% (+3.9ppt). In addition to a lower effective tax rate at 30.2% (-2.5ppt), 3Q17 recorded net earnings of RM8.0m (+57%).

Challenges still abound. The demand for its products is typically resilient given that they are catered to a niche market. However, growth opportunities on the domestic front are challenged by the prevailing poor consumer sentiment. In addition, aggressive marketing efforts persist in Guangzhou, China as part of the group’s plans to penetrate the market there. This will result in higher pressure on the group’s marketing costs. On the other hand, unfavourable input costs trend (i.e. PET resin) may also compress its margins in the short-run. In light of this, the group aims to improve its operational efficiency via the construction of a new automated warehouse in Taiping in 3 years. The project would increase the group’s production capacity by 20%, improve economies of scale and enhance storage facilities.

Post results, we maintain our FY17E/FY18E earnings estimate.

Maintain MARKET PERFORM and TP of RM2.20. Our TP is based on an unchanged blended FY18E PER/PBV ratio of 13.0x/1.3x (both based on average 3-year PER and PBV) from 13.0x FYE18E PER.

The recently completed private placement with Dymon Asia Pte Ltd has alleviated the funding concerns for the new warehouse. Amidst the shareholder dilution of 15%, the group will benefit from Dymon’s operational and strategic know-how for companies in the Asian consumer, food and beverage industries.

Source: Kenanga Research - 29 Nov 2017