1H18 core PATAMI of RM220.4m (-14%) and dividend of 27.0 sen were below estimates, due to overly bullish growth assumptions. While we had anticipated better results following high capital investments by the group to improve productivity and efficiency, this was stymied by poor sales performance. Maintain UNDERPERFORM and TP of RM29.10 for now, pending further details from upcoming briefing.

1H18 Core PATAMI below expectations. 1H18 core PATAMI of RM220.4m was below our/consensus estimates, making up 53%/50% of respective full-year estimates. 2H18 is expected to be weaker from poorer seasonality and festive spending. The negative deviation is due to the slow recovery in Malaysian sales and higher-than-expected production costs. An interim dividend of 27.0 sen was declared. However, this is below our 70.0 sen full-year estimate as the group typically pays dividends twice a year.

YoY, 6M18 top-line of RM2.08b was flattish, derived from slightly weaker F&B Malaysia sales and slightly better F&B Thailand revenue. Strengthening of domestic currency could have had undermined export sales from both segments. Group core EBIT’s decline of 17% was mainly caused by higher A&P spend and input costs by Malaysian operations. Adjusting for non-core items, core net profits closed at RM220.4m (-14%) after incurring less effective taxes at 7.7% (-2.4ppt).

QoQ, 2Q18 revenue was 5% lower than 1Q18 despite enjoying a later Chinese New Year season. F&B Malaysia and F&B Thailand sales declined by 3% and 8%, respectively, due to lower dairy contribution in both markets. A decrease in core operating profits by 19% was primarily the result of the same loss of revenue. This further translated to a core PATAMI of RM100.1m (-17%).

Better capabilities undermined by poor sales. Since 2017, the group had invested heavily into expanding its production capabilities to improve capacity and solve bottleneck issues. Furthermore, margin expansion from better economies of scale was anticipated as supply lines become more fluid. However, we believe that difficulty in capturing consumer demand may undermine the group’s efforts in protecting its bottom-line. This may be in part due to the high overheads from the more capital intensive system which affected margins at this point. In addition, the recovering Ringgit may be a going concern for the group as more than 50% of its sales are transacted in foreign currency.

Maintain UNDERPERFORM with an unchanged TP of RM29.10. We derive our TP from an unchanged 23.5x FY19E PER. We maintain our FY18E/FY19E earnings estimates unchanged for now pending further details from the briefing today, although our new earnings assumptions could have a downside bias post-updates.

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

Source: Kenanga Research - 4 May 2018