Post management meeting, we are reassured that the implementations of group long-term strategies are on track. This includes expanding capabilities in the marine and livestock segments. Palm oil operations should benefit a maturing estate. However, we believe the positives are already priced in given the stock’s rich valuations, with the progressive share price increase during the year. Hence, we downgrade to UNDERPERFORM with a higher TP of RM3.90.

Higher yields and added capacity in 2H18 to boost MPM productivity. In 1H18, the marine product manufacturing (MPM) segment recorded flattish YoY sales at RM432.7m but saw a 15% dip in PBT and segment margins. This was caused by less optimal catch rates which led to higher surimi imports to cater to downstream product demand. Management is confident on more favourable yields in the 2H18 which should cushion 1H18’s weaker performance. The construction of the new plants in its Hutan Melintang base is on track to be operational by end-FY18. We believe the added capacity and efficiency should support the MPM’s longer-term outlook, alongside the group’s 5-year plan to expand its deep-sea fishing fleet by c.50% in FY2022.

Maturing palm oil (PO) portfolio. Recall that c.90% of the group’s existing upstream plantation is located in Tarakan, Indonesia. Management guided that c.60% are at a prime age profile which should have higher fresh fruit bunch (FFB) yields. This has been reflected in 1H18’s PO sales, which grew 23% YoY with better PBT contributions and margins by +84% on recovering CPO prices. The group is poised to benefit from a potential 30% improvement in FFB production in FY18 from its younger estate.

Integrated livestock farming (ILF) activities on the rise. Despite an overcrowded egg market in Peninsular Malaysia, the group’s ILF business is strongly backed by sustainable prices in East Malaysia and its Indonesia and Vietnam markets. 1H18 ILF sales increased by 23% thanks to this although seeing thinning margins from poorer Malaysian contributions. Near term plans for the segment includes construction of regional feed mills to support demand and to expand layering capacity by 30% in Vietnam by FY18 where demand has been strong.

(Please refer to overleaf for comments on its FamilyMart operations, which is a sub-segment of ILF activities.)

A long way across the horizon. We are still optimistic on the group’s longer-term growth prospects given how well certain initiatives have been executed. Leveraging on multiple segments also reduces exposure to the weakening of a certain market, which most players are facing at present. While we still believe the group’s position as a prominent market player is well intact, we view the collective fruits of its investments to only yield long term rewards (i.e. larger MPM fleet and FamilyMart portfolio) backed by its 5-year expansion plan. Although PO activities have gained traction recently, its total contributions to group profits account for less than 10% and may not increase as significantly in proportion.

Post meeting, we leave our assumptions unchanged as we believe the abovementioned merits have been sufficiently accounted for.

Downgrade to UNDERPERFORM with a higher TP of RM3.90 (from RM3.78, previously). Our valuation is based on a slightly higher 28.0x FY19E PER (from 27.0x, previously), as we relook into 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. Post-bonus issue in September, the stock had registered capital gains of c.30% since the beginning of CY17. Further, the low dividend prospects may cause yield-seeking investors to look elsewhere.

Source: Kenanga Research - 20 Dec 2017