9M18 core PATAMI of RM25.5m (-13%) underperformed on higher production and marketing expenses. A 2.5 sen dividend declared is within estimates. We expect the group to soon be able to revise their unfavourable commodity hedging positions to meaningfully shift earnings. However, this may only be reaped in the medium term. We cut our FY18E/FY19E estimates by 14.7%/22.2% for lower margins. Maintain OUTPERFORM with a lower TP of RM2.00 (from RM2.45).

9M18 below expectations. 9M18 sales of RM344.0m are within our expectations but core PATAMI of RM25.5m made up 76% of full-year estimate. We deem this to be below in anticipation of a weaker 4Q18 quarter due to lack of seasonality. The negative deviation is due to higher-than-expected raw material prices. An interim 2.5 sen dividend was announced, as expected. YTD dividend payments amount to 9.0 sen.

YoY, 9M18 top-line of RM344.0m increased by 12% following a 29% rise in export demand, but was slightly offset by a 2% decline in domestic sales. Adjusted EBITDA plunged by 33% to RM31.6m due to unfavourable impact from high input prices (i.e. coffee, sugar, packaging) and greater numbers of staff employed. Operating expenses in 9M18 was also inflated by higher marketing spend in the export regions (i.e. Middle East). Supported slightly by lower effective taxes at 9.0% (-1.0ppt), 9M18 core PATAMI registered at RM25.5m (-13%). Adjustments were made to account for write offs, forex gains/(losses) and a reversal of bonus provision for staff estimated to be c.RM3.2m in 3Q18.

QoQ, 3Q18 sales of RM115.1m was weaker by 4%, likely due to the normalisation of demand from the export segment (-6%). Adjusted EBITDA stood at RM13.0m (+2%) possibly due to lower marketing expenses incurred during the quarter. Core PATAMI ended at RM11.3m (+11%) after the same adjustments above.

Nearing the end of high cost pressures? Despite encouraging traction from the export market (which now accounts for more than 50% of sales), the group’s bottom-line fails to pick up a similar pace due to unfavourable hedging positions in their coffee costs. This prevented the group from benefitting from the recovery in global commodity prices. Nonetheless, we believe that the group’s hedging positions are due to be revisited after a one-year lapse which may ultimately see a paradigm shift towards the group’s cost trends. However, this may only occur in the medium term or within FY19 as existing inventories purchased at higher costs are required to be phased off.

Post results, while we maintain our FY18E/FY19E sales estimates, we cut our margins assumptions to account for greater production costs to reduce net earnings by 14.7%/22.2%. However, we maintain our dividend assumptions in lieu of the group’s upbeat dividend trends.

Maintain OUTPERFORM with a lower TP of RM2.00 (from RM2.45, previously). Our new TP is derived from a revised FY19E EPS of 11.2 sen against a higher 18.0x PER as we relook the stock’s 3-year average Fwd. PER. While earnings outlook may appear bleak for the stock, we believe that its saving grace arrives in the form of solid dividend yields which we expect to be at 6.0%/7.2% for FY18/FY19.

Risks to our call include: (i) lower-than-expected export sales, (ii) prolonged exposure to high commodity prices, and (iii) lower-thanexpected dividend payments.

Source: Kenanga Research - 28 Feb 2018