FY17 core net profit of RM23.8m (-2%) and final interim dividend of 5.5 sen are within expectations. Short-term challenges include: (i) drag from poor consumer sentiment, and (ii) slow turnaround in the China market. The group aims to achieve better efficiencies and cost savings with a new automated warehouse, estimated to be completed in FY20. Maintain MARKET PERFORM but raise TP to RM2.40 (from RM2.20) on higher book value, post results update.

FY17 core net profit within expectations. FY17 core earnings of RM23.8m is within expectations, accounting for 103%/102% of our/consensus full-year estimates. The final interim dividend of 5.5 sen declared is also within our 5.0 sen full-year expectations.

YoY, FY17 sales of RM313.8m is slightly weaker by 1% due to softer domestic sentiment. We believe down-trading from the premium “Spritzer” brand to the less premium “Cactus” and “Summer” brands may have contributing factors. EBITDA recorded at RM49.1m (+2%) possibly as a normalisation of the high gestation expenses incurred in CY16 in penetrating the China market. EBITDA margins inched slightly to 15.7% (+0.5ppt). While net profits stood at RM25.5m from lower effective tax of 27.8% (-0.9ppt), adjustments for one-off gains from revaluation of investment properties and donation claims drew core earnings to stand at RM23.8m (-2%).

QoQ, 4Q17 sales of RM79.4m dipped by 5% as 3Q17 performance was driven by the 2017 SEA Games sporting event. EBITDA decreased to RM12.9m (-13.5%) as profits were dragged by high operating costs, especially in the China market. Post-adjustments to the same one-off items above, 4Q17 core net profit closed at RM5.6m (-31%).

In need of a meaningful push. Poor consumer sentiment is expected to hamper demand even in the niche mineral water market. The landscape in the Guangzhou, China market also faces challenges from stiff competition and higher marketing spend. High packaging costs, especially from unfavourable PET resin price trends may also result in further thinning of margins. Henceforth, the group is adamant in ensuring the successful completion of its new automated warehouse as the resulting increase in production capacity and efficiency could draw some much-needed cost savings. The warehouse is set to be operational by FY20.

Post results, we tweak our FY18E assumptions by 1.8% following housekeeping from the full-year FY17 performance. We also introduce our FY19E numbers.

Maintain MARKET PERFORM but raise our TP to RM2.40 (from RM2.20, previously). 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) on the revised FY18E EPS/BVPS. Changes were primarily due to adjustments to our FY18E book value in accordance to FY17 numbers. The recently completed private placement with Dymon Asia Pte Ltd has alleviated the funding concerns for the new warehouse. Despite 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.

Risks to our call include: (i) poorer-than-expected sales, (ii) higher- than-expected costs exposure, (iii) delay in the construction of the new automated warehouse.

Source: Kenanga Research - 27 Feb 2018