9M18 net profit of RM20.8m (+15%) came below our estimate but within consensus, due to greater input costs which impacted margins. The absence of dividends was expected. While near-term profitability could be affected by higher production costs, strategies are in place to ensure longer-term profitability, with the commissioning of an automated warehouse and trading segment breaking even. Maintain MP but with a lower TP of RM2.30 (from RM2.40).

9M18 missed our estimate. 9M18 net profit of RM20.8m made up 73%/78% of our/consensus estimates. We view this to be below our estimate but within consensus. The negative deviation was due to higher-than-expected cost inflation, mainly from the rise in PET resin prices. We anticipate 4Q18 to account for c.20% of total revenue, attributed to seasonal weakness. The lack of dividends was expected, as the group typically pays a single year-end dividend.

YoY, 9M18 turnover increased to RM262.2m (+12%) as demand was spurred by more aggressive promotional activities, backed by new product variants. EBITDA also expanded closely by 11%. However, this appears to be a result of the key manufacturing segment (95% of sales) which saw declining operating profit (RM30.6m, -10%) but was supported by narrowing losses from the trading segment (-RM2.4m, +66%). Group production could be facing pressures from higher PET resin costs. However, more efficient operations of the trading arm in China enabled better cost savings and it could break even in the medium term. 9M18 net profit closed at RM20.8m (+15%) on lower effective taxes at 29.7% (-1.0ppt).

QoQ, 3Q18 revenue growth of 15% is likely triggered by heavy purchases during the “tax holiday” season. However, owing to the abovementioned higher production costs and effective taxes (31.4%, +2.5ppt), 3Q18 net earnings only registered a 10% growth to RM7.4m.

Angling around cost pressures. The group is able to sustain growth with its well-rounded product mix to cater to various market needs. However, the previous rise in crude oil prices had dented group’s input costs and may keep commodity trends toppish in the near-term. Nonetheless, the group is poised to benefit from the fruition of its long- term strategies, being: (i) the construction of its automated warehouse by FY20, (ii) cost rationalisation of it Guangzhou operations, which could soon break even, and (iii) aggressive marketing of higher margin products (i.e. sparkling water products).

Post results, we trim our FY18E/FY19E earnings by 4.9%/4.2%, mainly led by lower margin assumptions from higher PET prices.

Maintain MARKET PERFORM but with a TP of RM2.30 (from RM2.40, previously). Our TP is based on a targeted 16.0x FY19E PER which is closely in line with the group’s 3-year mean, but on a lower FY19E EPS. While sentiment for the stock may appear soft, we believe the group is poised to demonstrate longer-term improvement as most of its investments aim to bear results post FY19.

Risks to our call include: (i) poorer-than-expected sales, (ii) higher- than-expected costs exposure, and (iii) delay in the construction of the new automated warehouse.

Source: Kenanga Research - 22 Nov 2018