Additional capex of RM25.0m will be invested to resolve bottleneck issues in its Malaysian dairy production lines, s which could improve F&B Malaysia’s dairy products domestic and export sales. However, we do not expect noticeable improvements in the local scene due to weak sentiment. Downgrade to MARKET PERFORM post-rally but raise our TP to RM29.10 (from RM28.85) on slightly better export expectations.

Solving local bottlenecks. The group announced a new capex investment of RM25.0m to resolve bottleneck issues in its Pulau Indah dairy plant. The initiative is expected to enlarge its dairy production capacity in Malaysia, which could enable further domestic and export growth. To recap, the group plans to achieve RM800.0m export sales by CY2020, of which RM500.0m is aimed to be contributed by the F&B Malaysia segment. The abovementioned programme could potentially quicken the said milestone. Note that the F&B Thailand segment caters to a separate product and client portfolio.

We are positive with this news, as it is beneficial to the group’s expansion plan to widen its export presence. This also mitigates the group’s exposure to the softer domestic market which is suppressed by poor consumer sentiment. Exports account for c.15% of FY17 sales and we expect this proportion to improve to c.16%/c.18% in FY18/FY19 from this exercise. However, we make no changes to our domestic sales growth assumptions given the slower-than-expected recovery in consumer sentiment indicators.

Prospect supported by stronger operating pillars. The recent strengthening of the Malaysian Ringgit is expected to be a boon to the group due to their high raw material imports. However, we see this as a medium term benefit as the group has to clear existing raw material inventories purchased at previously higher forex levels. Further, weaker foreign currencies could offset export gains. We continue to anticipate margin expansions post-FY17 restructuring exercises. This includes strategies such as rationalising storage systems and manpower requirements. In addition to this, the progressive rolling out of new production lines as part of its 3-year expansion plan should improve production capabilities and efficiency. Such projects include expanding its mineral water plant in Bentong and its sweetened condensed milk pouch & tube filling line in Rojana, Thailand.

We make minor adjustments to our estimates, accounting for better export contributions from F&B Malaysia operations. This raises our FY18E/FY19E net earnings by 0.4%/0.9%.

Downgrade to MARKET PERFORM with a slightly higher TP of RM29.10 (from RM28.85, previously). We derive our TP on an unchanged 23.5x PER (5-year average Fwd. PER) on its higher FY19E EPS. We believe the anticipation for better operational gains has already been priced in. Nonetheless, the group’s strong operating cash position could allow for further investments for further operational enhancements.

Risks to our call include: (i) volatile fluctuations in forex, (ii) weakerthan-expected export growth, and (iii) delay in implementation of capex plans.

Source: Kenanga Research - 25 Jan 2018