1Q19 PATAMI of RM43.9m (+4%) and absence of dividends were within expectations. While its marine and palm oil segments may be challenged by shifting industry tides, its livestock segment appears to be well-rooted to capitalise on the global rise in feed raw material prices. Maintain UNDERPERFORM and TP of RM4.70.

1Q19 as expected. 1Q19 PATAMI of RM43.9m is within our estimate but below consensus, at 20% and 18% of respective full-year estimates. Although unfavourable seasonal factors are typically experienced in April-June period, we believe the consensus may have over-provided for it. No dividend was announced, as expected. The group tends to pay a single interim dividend every year, which we forecast to be 4.5 sen for FY19.

YoY, 3M19 revenue of RM811.2m (+5%) was driven mainly by higher integrated livestock farming (ILF) sales, which capitalised on the higher feed material prices. However, this was offset by lower Palm Oil Activities (POA) results from lower CPO prices and fruit yields. Sales from marine product manufacturing (MPM) segment were flattish. Group PBT grew by 2% as segment profits were also led by the above. However, ILF still commanded the lowest segmental PBT margin at 3.3% (+0.6ppt). 3M19 PATAMI registered at RM43.9m (+4%) following better minority gains against a higher ETR of 14.7% (+2.6ppt).

QoQ, 1Q19 sales improved thanks to stronger ASP in the ILF segment, but were hampered by weaker POA numbers, which were led by similar abovementioned reasons. However, Group PBT declined by 8% as POA and ILF margins were comparatively weaker, at 3.9% (-4.5ppt) and 3.3% (-2.1ppt). This was buffered by higher MPM margins at 14.5% (+4.0ppt) on better seasonal yield rates. Thanks to a lower ETR (- 2.8ppt), 1Q19’s PATAMI only declined by 5%.

Shifting climate. The MPM segment’s flattish performance suggests that unfavourable weather conditions may still persist. The trend appears consistent as demonstrated in up to 9 continuous quarters of weakness. On the other hand, the POA segment now faces lower CPO prices which it used to enjoy better rates in FY18 (1Q19: RM2,364/mt, 1Q18: RM2,746/mt). The saving grace for the group could come from the ILF segment which emerged as the beneficiary of rising global feed raw material prices, aggravated by global pressures. On the other hand, the FamilyMart convenience store chain is expected to generate profits by FY20 when it achieves its optimal store base of 120 locations.

Post results, we leave our FY19E/FY20E assumptions unchanged.

Maintain UNDERPERFORM and TP of RM4.70. Our valuation is based on an unchanged 35.0x FY19E PER (at +1.0SD over the 3-year mean PER, applied across large cap F&B stocks). While the group has strong fundamentals, we believe most of the positives may already been 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-thanexpected demand of poultry products abroad.

Source: Kenanga Research - 28 Aug 2018