Post-meeting, we are reassured that the implementations of the group’s long-term strategies are on track. The marine products manufacturing (MPM) should see recovering results post-poor fishing yields in FY18. Palm oil activities (POA) will benefit from its maturing estate while integrated livestock farming (ILF) may operate in a mixed environment. We believe the positives are priced-in given the stock’s rich valuations. Maintain UNDERPERFORM and TP of RM3.90.

Hopeful for better years ahead in MPM. Recall that in FY18, the MPM segment saw a 15% decline in PBT despite a 3% expansion in sales. Lower catch rates led to higher imports required to support surimi production. As weather conditions are showing meaningful improvement, management is hopeful for better fishing yields that could return margins to healthier levels. This could be further supported by the recently commissioned new surimi-plants in Hutan Melintang. In FY17, PBT margins registered at 16.7% as opposed to 13.7% in FY18. With the coming 2020 Tokyo Olympics, management mulls potential collaborations to support an anticipate surge in demand there, which could boost FY20.

POA to sustain with mature estate. With its c.60% prime age profile, management is hopeful for a c.15% growth in the fresh fruit bunch (FFB) yields. In the medium term, c.30% of the plantation portfolio which is of a younger age category is poised to contribute further to FFB output. Management anticipates CPO prices to trail between RM2,350/MT and RM2,450/MT for FY19. This is in-line with our in- house expectations of RM2,400/MT on average for CY18.

Overcrowded and mixed livestock space. The egg market in Peninsular Malaysia is overcrowded as egg producers continue to scale up production. In the ILF recent results, its Indonesian performance was dampened by poorer broiler contributions. Going forward, management expects its other markets (i.e. East Malaysia, Vietnam) to remain stable. Hence, the expanded Vietnam poultry layer unit and feed mills are expected to contribute favourably to the group.

FamilyMart’s unyielding expansion. On the latest count, it has opened 49 new stores, on track with FY18’s target. Management earmarks to open another 50 stores in FY19 towards their FY22 target of 300 stores. While operations are not expected to break even in FY19, management expects the store chain to become profitable in FY20 from an expected store base of c.120 branches.

Post meeting, we continue to remain optimistic with the delivery of topline growth amidst challenges in certain sectors. This is partly thanks to the group’s well-diversified base and regional exposure. While heavy investments are geared mainly for longer term gain under its 5-year plan, the group’s market leading position should keep the company relevant amidst a highly competitive landscape. However, we leave our assumptions unchanged as we believe the abovementioned merits have been sufficiently accounted in our estimates.

Maintain UNDERPERFORM and TP of RM3.90. Our valuation is based on an unchanged 29.0x FY19E PER. The ascribed valuation is in line with the group’s 3-year mean, following a strong buying rally across the consumer space. While the group has strong fundamentals, we believe most of the positives may be already priced into its rich valuations. Furthermore, the low dividend prospects may cause yield- seeking investors to look elsewhere.

Risks to our call include: (i) significant improvement to MPM sales, (ii) significant uptick in palm oil prices and sales volume, (iii) better- than-expected demand of poultry products abroad.

Source: Kenanga Research - 11 Jun 2018