1Q18 core PATAMI of RM22.3m (+6.2% YoY) came in above expectations at 38%/35% of our/consensus full-year forecasts. We upgrade our FY18E/FY19E net profit by 18%/8%. Correspondingly, we upgrade our TP from RM3.85 to RM4.25 based on 16x FY19E EPS (-0.5SD below 5-year historical forward mean) to better reflect stable earnings ahead. Reiterate MARKET PERFORM.

1Q18 core PATAMI of RM22.3m (+6.2% YoY), excluding provision for and write-off of inventories (RM4.6m), came in above expectations at 38%/35% of our/consensus full-year forecasts. The variance factor from our result is better-than-expected performance in the logistics and distribution division. A first interim DPS of 5.0 sen (1Q16: 4 sen) was declared, which came in within our expectation.

Result Highlights. YoY, 1Q18 Core PATAMI rose 6.2% to RM22.3m, excluding provision for and write-off of inventories (RM4.6m) thanks to better performance from the Logistics and Distribution division. The Logistics and Distribution Division’s PBT jumped more than four-fold to RM10m from RM2m in 1Q17 attributed to improve streamlining of marketing and promotional expenses. However, the Manufacturing Division’s PBT fell 23% to RM20m due to lower demand under the concession business as well as increased research and development expenses. The Indonesia division recorded a deficit of RM0.4m compared to a PBT of RM0.9m, due to the depreciation of the Malaysian Ringgit against the Indonesian Rupiah and increased finance costs

QoQ, 1Q18 revenue rose 0.8% due to increased orders from concession business. Better performance from manufacturing coupled with cost containment led to higher margin. This led to PBT margin expansion by 2.0ppt to 5% in 1Q18 from 3% in 4Q17. Correspondingly, 1Q18 core PATAMI rose 2.8%.

Outlook. Although earnings were previously impacted by the temporary closure of production lines, this will subsequently enable the Group to move forward with the commercialisation of new products as some of the products were approved ahead of schedule. The Indonesia operations remain a key area of growth, while further progress is being made in the European Union as the Group seeks to expand its global presence. In tandem with this, the Group is focused on implementing continuous cost optimisation measures across its operations. Over the longer term, we expect its manufacturing division to propel earnings growth. The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products. This should boost demand for its products and lift earnings.

Upgrade FY18E/FY19E net profit by 18%/8%. We upgrade our FY18E/FY19E net profit by 18%/8% to take into account the better- than-expected performance in the Logistics and Distribution division.

Maintain MP, TP raised to RM4.25. Correspondingly, we raised our TP from RM3.85 to RM4.25 based on 16x FY19E EPS (-0.5SD below 5-year historical forward mean) to better reflect more stable earnings ahead. Reiterate Market Perform.

Key downside risk is the renewal of government concession, which is expected to expire in 2019.

Source: Kenanga Research - 17 May 2018