1H19 PATAMI of RM104.4m (+8%) and absence of dividends are within expectations. The recovery in the marine segment’s yield and expanding base of the integrated livestock segment as well as the eventual turn-around of the group’s convenience store chain could translate well to the group’s long-term profitability. We maintain UP but raise our TP to RM5.70 (from RM5.00) on higher valuations.

1H19 as expected. 6M19 PATAMI of RM104.4m is within our/ consensus estimates, making up 48%/46% of respective full-year forecasts. No dividend was announced, as expected. The group typically pays a single interim dividend annually, expected to be 4.5 sen for FY19.

YoY, 1H19 revenue of RM1.74b (+9%) was led by returning catch rates from the marine products manufacturing (MPM) segment and higher integrated livestock farming (ILF) turnover, possibly from higher egg sales with increased output. Palm oil activities (POA), however, declined from poorer yields arising from unfavourable weather conditions. In terms of the group PBT, the 3% improvement was due to poorer margins across business segments, dragged by more challenging market environments but supported by higher sales volumes. 1H19 PATAMI closed at RM104.4m (+8%) following lower minority losses and a lower effective tax rate of 11.0% (-1.4ppt).

QoQ, 2Q19 top-line expanded by 13% as demand picked up across business segments from a seasonally softer 1Q19. PBT grew by 31%, thanks to better profits from MPM and ILF segments as higher catch rates and recovering poultry product prices expanded margins. 2Q19 PATAMI registered at RM60.5m (+38%) mainly from lower effective taxes of 8.2% (-6.5ppt).

Growing with time. The recovery in the group’s MPM segment could suggest a timely turnaround for the business unit, having recorded nine consecutive quarters of QoQ declines. Boosters are seen coming from the commissioning of a new surimi plant and the progress expansion of fleet size to expand group capabilities and to buffer against poor yields in the future. The POA unit may experience more turbulent times ahead as CPO prices begin to trend downwards while seasonal weather patterns may continue to undermine near-term results. Nonetheless, we are not too concerned by this as the segments contribution to the group is expected to be less meaningful (<10% PBT). ILF continued to show the largest growth reach with the group keeping their presence within Vietnam and Indonesia. Further, the group’s feed milling production could provide some buffer against commodity fluctuations, which had proven detrimental to other local players in the market. 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 but with a higher TP of RM5.70 (from RM5.00). Our valuation is based on a higher 40.0x FY20E PER (within the stock’s +1.5SD over its 3-year mean PER), from 35.0x. We believe the upgrade is reflective of a higher investor valuation appetite, attributed by the stock’s defensiveness in the consumer staples space. However, we also believe that current trading valuations could be excessive with the stock’s: (i) low dividend prospects at c.1% (vs. peer avg of 3-4%), and (ii) slower earnings growth expectations c.6% (vs. peer avg of +10%).

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 - 27 Nov 2018