1Q19 CNP of RM18.0m (-43% YoY, -69% QoQ) came in below expectations at 9% of both our/consensus full-year estimates, due to lower-than-expected sales and margin. We understand that the group would bear the SST cost (if less than 10% of total cost) to maintain consumer demand for its well-known affordable products range. As such, we cut our FY19E/FY20E CNP by 8%/10%. Correspondingly, we cut our TP to RM4.90 (from RM5.60) and continue to maintain our UP call.

1Q19 below expectations. 1Q19 CNP of RM18.0m (-43% YoY, -69% QoQ) came in below expectations at 9% of both our/consensus full-year estimates, due to lower-than-expected sales and margin. A 2nd interim DPS of 2.5 sen was declared for the quarter. Recall that, a 1st interim DPS of 2.5 sen was declared on 27th August 2018 (payment date on 28th September 2018), bringing the YTD-FY19 DPS to 5.0 sen, which is within our expectations as 60% of dividend pay-out is typically in 2H.

Result highlights, 1Q19 CNP plunged 43% YoY and 69% QoQ, dragged down by: (i) slower sales (-31% QoQ) which were unable to match the seasonally stronger Hari Raya festive season sales in 4Q18, despite boosted by the zero-rated tax holiday sales (+5% YoY), (ii) contraction in PBT margin by 5.2ppt YoY and 8.8ppt QoQ to 8.1% from 13.3% in 1Q18 and 16.9% in 4Q18, from the rise in staff cost, rental and some other store operating expenses such as absorbing SST in September 2018, which translated into higher selling and distribution expenses allocation at 33% (1Q18: 32%, 4Q18: 26%), and (iii) higher effective tax rate of 32.5% (1Q18: 25.5%, 4Q18: 29.0%).

Outlook. Moving forward, we expect the earnings momentum to be limited by: (i) higher costs from the new SST, (ii) the gestation periods for its Cambodian and Thailand operations, which are expected to incur higher start-up costs than Malaysian ones, and (iii) weakening in MYR against major currency (i.e. USD and RMB).

Besides, we also understand that group would bear the SST cost (if less than 10% of total cost) to maintain consumer demand for its well- known affordable products range.

For FY19, the group targeted for not more than 10 outlets for the local market and Thailand market to streamline cost allocation, while maintaining its status quo for Cambodia operations.

Cut FY19E/FY20E CNP by 8%/10%. We cut our FY19E/FY20E CNP by 8%/10% to reflect the lower-than-expected sales and lower-than- expected margin.

As such, we cut our TP to RM4.90 (from RM5.60) but maintain our UNDERPERFORM call. Our current TP is based on an unchanged 17x CY19E EPS, implying +2.0 SD of its 5-year forward historical mean PER.

Risks to our call include: (i) higher-than-expected sales, and (ii) lower- than-expected operating expenses.

Source: Kenanga Research - 30 Nov 2018