FY18 core net profit of RM396.9m (-2%) is above our expectation, led by higher margin gains from the group’s restructuring exercise. The full-year dividend of 57.5 sen is within estimates. While we do not anticipate the new sugar excise duty to undermine demand significantly, the group’s streamlined operational systems could support profitability from any challenges. Upgrade to MARKET PERFORM but maintain TP of RM34.45, pending briefing updates.

FY18 ended stronger. FY18 core PATAMI of RM396.9m is above our estimate but within consensus, amounting to 110% and 101% of respective full-year expectations. The negative deviation was owing to our expectations that 4Q would persist as a seasonally weaker period. While sales estimates were much within, the stronger performance appears to be backed by higher-than-expected margins expansion from cost controls measures implemented. Interim dividend of 35.0 sen was announced, leading to a full-year payout of 57.5 sen. We deem this to be within our anticipated FY18 payment of 60.0 sen.

YoY, FY18 sales of RM4.11b was flattish across both F&B Malaysia and F&B Thailand segments. Core operating profit performed better (+<2%) thanks to cost savings from the group’s operational restructuring and streamlining of processes. Adjusting for non-core items, core net earnings recorded at RM396.9m (-2%) on higher effective taxes at 8.9% (+0.3ppt).

QoQ, 4Q18 revenue declined by 3%, likely due to seasonal weakness from F&B Malaysia’s post-Hari Raya period. Core operating profit was weaker by 12% due to higher marketing spend during the period, particularly to boost F&B Thailand’s performance. Aggravated further by high effective taxes at 18.5% (+16.1ppt, likely owing to timing differences in tax incentive claims), core PATAMI closed at RM76.9m (- 24%).

Finding the sweet spot. With the introduction of a new sugar excise duties, we believe a large portion of the group’s product portfolio would be affected, which we expect to be up to 40%. To recap, the new indirect tax applies a charge of 40.0sen/litre on manufactured and repackaged beverages with sugar content above 5.0g/100ml or fruit and vegetable juices with a sugar content of 12.0g/100ml. We believe this would translate to a 3-5% increment in selling prices. However, we believe that this may not be overly detrimental to overall demand due to the currently affordable price point of the group’s offerings. Still, the savings from the group’s restructuring exercises would provide some buffer in holding any negative impact arising from the above.

Post-results, we leave our earnings assumptions for FY19E unchanged for now, although our new earnings assumptions could be upside biased. At the same time, we introduce our FY20E numbers.

Upgrade to MARKET PERFORM (from UNDERPERFORM) with an unchanged TP of RM34.45. Our TP is based on an unchanged 30.0x FY19E PER (+1.0SD over the stock’s 3-year mean). We re-rate the stock to Market Perform with the easing in stock prices from slightly expensive valuations. Dividend expectations from the stock may continue to be tepid due to its low-yield prospects. Nonetheless, the group’s strong operating cash position could allow for further investments for further operational enhancements.

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

Source: Kenanga Research - 09 Nov 2018