1Q18 core net profit of RM120.3m (-7%) and absence of dividend are within expectations. Poor domestic sales may continue to hinder top-line growth offsetting better Thailand and export contributions. Operationally, the group should benefit from its FY17 restructuring exercise while the strengthening MYR could ease production costs in the medium term. Maintain MARKET PERFORM and TP of RM29.10.

1Q18 core PATAMI within. 1Q18 core PATAMI of RM120.3m is within our/consensus expectations, making up 29.0%/28.0% of respective fullyear estimates due to seasonality. No dividend is declared, as expected.

YoY, 1Q18 revenue fell slightly by 2% to RM1.07b as F&B Malaysia sales dipped by 8% due to a later Chinese New Year season. This was buffered by stronger F&B Thailand sales (+6%) from better dairy exports. Group EBIT fell by c.20% as both segments were dampened by higher input costs. However, the better operating structure (thanks to post-restructuring exercise) likely lowered operating expenses by 10%. Adjusting for one-off restructuring expenses and other items incurred, core net profit registered at RM120.3m (-7%).

QoQ, 1Q18 saw 10% growth in sales following 4Q17 weaker fasting season, albeit supported by the 2017 SEA Games. Pre-buying for Chinese New Year festivities are expected to contribute to the revenue growth. Excluding restructuring expenses and one-off expenses, operating profit improved by 125% from better operating condition and lower marketing spend. Following this, 1Q18 core net profit also expanded by 125% to RM120.3m.

Strong roots against unfavourable headwinds. Poorer domestic sales contributions on tighter consumer spending could continue to hamper top-line growth potential. However, the recent strengthening of the Malaysian Ringgit is expected to be a boon to the group due to their high raw material imports. Despite this, we see this only as a medium term benefit as the group has to clear existing raw material inventories purchased at previously higher forex levels. In addition, weaker foreign currencies could offset export gains. At the meantime, we continue to anticipate margin expansions post-FY17 restructuring exercises.

Post results, we make not changes to our earnings assumptions.

Maintain MARKET PERFORM with an unchanged TP of RM29.10.

We derive our TP from an ascribed 23.5x PER (5-year average fwd. PER) on its FY19E EPS of 123.8 sen. 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. Recall that the group had recently announced further capex allocation of RM25.0m in January to resolve production bottleneck issues.

Risks to our call include: (i) weaker-than-expected sales, (ii) higherthan-expected operating costs, and (iii) unfavourable currency exchange exposure to the group.

Source: Kenanga Research - 7 Feb 2018