9M18 net profit of RM535.1m (+5% YoY) and interim dividend of 70.0 sen declared were within expectations. We believe the year could end with broader profits thanks to efficiency gains from the new National Distribution Centre and cost environment. We make no changes to our earnings estimates for now, pending further details from today’s briefing. The presently stretched valuations suggest that growth catalyst may have already been priced-in. Maintain UP and TP of RM129.00.

9M18 within. 9M18 net profit of RM535.1m is within expectations. This accounts for 74% of our/consensus full-year estimates. Although 4Qs are usually seasonally softer, we anticipate stronger contributions this year from; (i) better operational efficiencies enjoyed with the launch of the new National Distribution Centre (NDC) and streamlined supply chain, (ii) more favourable average commodity costs; and (iii) an earlier 2019 CNY season which could contribute to forward buying at end- 2018. An interim dividend of 70.0 sen (YTD: 140.0 sen) declared. This is within our full-year estimates of 290.0 sen due to lumpy payments during the fourth reported quarter.

YoY, 9M18 revenue of RM4.17b grew by 5% on the back of sales growth in both domestic and export markets. New product variants of flagship brands continue to be the leading generator of sales. Gross profits rose by 9% (GP margins at 38.6%, +1.3ppt) thanks to overall better commodity prices. However, 9M18 net profits closed at RM535.1m (+5%) due to higher effective tax rates of 23.1% (+2.1ppt) during the year.

QoQ, 3Q18 sales increased by 9%, which could be attributed to normalising demand from 2Q18’s softer fasting season as well as better spending habits driven by the “tax-holiday” period of July to August 2018. Gross profits also trended higher (+12%) possibly added by better product mixes stimulated from the above. Still, 3Q18 net profits dipped by 17% to RM137.7m from greater marketing spend during the quarter and higher effective taxes (26.3%, +3.8ppt).

On an expansionary path. The commissioning of the group’s NDC during 3Q18 will enable the group to enjoy better economies of scale in their distribution and logistics management. Further savings may be reaped in the medium-term as a fully optimised operation will allow the group to manage its entire domestic supply chain via in-house resources. Additionally, the group’s recently announced disposal of its chilled dairy business which is expected to compromise near-term results. However, this could provide a back paddle for long-term growth from the consolidation of its Milo production capabilities for more integrated efficiencies and capacity expansion.

Post-results, we leave our FY18E-19E assumptions unchanged, pending updates from management in today’s results briefing. However, we do not anticipate meaningful revisions, if any.

Maintain UNDERPERFORM with an unchanged TP of RM129.00. Our valuation is based on a 37.0x FY19E PER (at +1.0SD over 3-year mean PER, applied across large cap F&B stocks) We believe most positives have already been priced in following its stretched valuations post-inclusion into a key market index. In addition, its dividend yields are less attractive at present price levels, generating 2.0%-2.4% in FY18-19.

Risks to our call include: (i) stronger-than-expected sales, (ii) more favourable commodity prices, and (iii) lower-than-expected operating costs.

Source: Kenanga Research - 31 Oct 2018