Post-meeting, we are reassured on its short-term outlook, as the marine products manufacturing (MPM) segment, supported by normalising catch rates, offsets the weaker palm oil activities (POA) which are dragged by low CPO prices. With regional exposure, integrated livestock farming (ILF) is seen operating in a mixed environment. We believe the positives are already priced-in, given the rich valuations. Maintain UNDERPERFORM and TP of RM5.70.

Better tidings for MPM. Recall that in 1H19, the MPM segment registered YoY growth of 12% and 11% for revenue and PBT, respectively. Management attributed the normalising results to better catch rates as weather conditions improved, translating to better overall margins for the segment. While management is hopeful that the favourable conditions would persist, we believe the commissioning of its new frozen surimi-based plant in 2H19 could provide an avenue for better cost optimisation if weather conditions change. Additionally, the completed expansion of its Hutan Melintang facilities and progressive expansion of its fishing fleet could provide growth opportunities for this segment. Potential collaborations ahead of the 2020 Tokyo Olympics could also be another win for the MPM segment.

POA on softer soil. The group’s palm oil estate currently consists primarily of prime aged palms (c.80%) with an anticipated c.15% growth in the fresh fruit bunch (FFB) yields. However, despite better output, the segment appears to suffer from diminishing CPO prices, which management anticipates to trail between RM1,800-RM2,000/mt for the remainder of FY19. To recap, 1H19 POA revenue and PBT registered at RM154.8m (-20% YoY) and RM1.2m (-86% YoY), respectively, arising from softer CPO prices, which undermined FFB production. Our in- house expectations are more positive, with an expected recovery to RM2,200/mt at the beginning of CY19.

Diversified ILF operations to hold its own. While the Malaysian ILF operations was dragged by depressed egg prices and higher feed costs in 1H19, the group’s Indonesia and Vietnam operations appear to operate in better conditions due to different regional market pricing and cost structure. This is due to Malaysian feeds being dependent on raw material imports while foreign operations are sustained by locally produced inputs. While the Malaysian landscape is expected to improve from the normalising supply and demand for eggs, we take comfort in the buffer provided in its foreign segments assuming the local tailwinds are not sustainable into the long term. FamilyMart’s expansion continues to be on track, to achieve c.90 locations by FY19, with the group opening its first store outside of the Klang Valley in Skudai, Johor. This sub-segment is expected to break even by FY20 from an expected store base of c.120 outlets.

Post meeting, we continue to remain optimistic with the delivery of top- line growth amidst challenges in certain sectors. This is partly thanks to the group’s well-diversified base and regional exposure. While heavy investments are geared mainly for longer term gain under its 5-year plan, the group’s market leading position should keep the company relevant amidst a highly competitive landscape. However, we trim our FY19E/FY20E earnings assumptions by 2.1%/0.2% mainly accounting for weaker POA results.

Maintain UNDERPERFORM and TP of RM5.70. Our valuation is based on a 40.0x FY20E PER (within the stock’s +1.5SD over its 3-year mean PER). We believe the rich valuations are due to high investors’ appetite, attributed to the stock defensive quality in the consumer staples space. However, current levels may be excessive owing to: (i) low dividend returns at c.1% (vs. peers’ average of 3-4%), and (ii) slower earnings growth expectation of c.6% (vs. peers’ average of 10%).

Source: Kenanga Research - 13 Dec 2018