9M18 PATAMI of RM159.9m (+8%) and absence of dividend were broadly within expectations. Going forward, the palm oil activities (POA) segment would benefit from better production rates while the integrated livestock farming (ILF) segment will continue to gain traction in foreign markets offsetting the bleak outlook of the marine product manufacturing (MPM) segment. Reiterate UNDERPERFORM with a higher TP of RM4.05 (from RM3.90).

9M18 within expectations. 9M18 PATAMI of RM159.9m (+8%) is broadly within our/consensus estimates, making up of 74%/73% of respective full-year assumptions. No dividend was announced, as expected. The group typically pays a single interim dividend annually, expected to be 4.0 sen for FY18.

YoY, 9M18 revenue of RM2.5b (+13%) benefited from higher sales across all segments. MPM sales grew by 5%, driven by better surimi operations, while POA sales was boosted by higher production and ILF saw better poultry demand. PBT was flattish at RM199.4 (+<0.1%) due to poorer MPM contributions as poorer catch rates dragging margins. This was supported by stronger profits from the POA and ILF segments from higher sales. 9M18 PATAMI registered at RM159.9m (+8%) thanks to lower effective taxes of 15.0% (-5.4pp). This is likely backed by high capex tax incentives from the MPM and ILF segments.

QoQ, 3Q18 sales grew by 10% from greater production volumes in both MPM (+22%) and POA (+36%) segments. This translated to a 9% increase in PBT. However, ILF operations dragged the quarter’s performance due to unfavourable sales mix affecting margins. Furthermore, higher tax rate during the quarter of 18.9% (+7.2ppt) and minority interests caused a 3% decline in PATAMI.

Sailing along. The group’s longer term prospects are backed by several initiatives to enhance its MPM and ILF segments. These include: (i) enhancing its marine deep-sea fishing fleet and frozen seafood processing competencies, (ii) investing in larger feed mill and poultry production, and (iii) expanding the FamilyMart convenience store chain. The POA segment is also set to gain from the maturity of its estate’s portfolio, which should contribute with greater fresh fruit bunch production. The challenging landscape in the marine segment due to prolonged unfavourable weather conditions may stop it from being the largest contributor to group earnings. The livestock segment, on the other hand, is experiencing higher acceptance level for its products, especially in the group’s foreign operations in Indonesia and Vietnam.

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

Reiterate UNDERPERFORM with a slightly higher TP of RM4.05 (from RM3.90, previously). Our valuation is based on a 29.0x FY19 PER (from 28.0x, previously), as we relook at 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.

Risks to our call include: (i) continuously poor weather conditions affecting MPM sales and margins, (ii) significant decrease in palm oil prices, (iii) lower-than-expected demand of poultry products abroad.

Source: Kenanga Research - 27 Feb 2018