1Q19 core PATAMI of RM124.5m (+7%) and absence of dividends are within expectations. The group looks toward expanding its capabilities to introduce new products amidst the pending sugar taxes. Backed by better demand and dairy commodity prices, Thailand operations could continue to helm the group’s profitability. Maintain MARKET PERFORM but slightly raise our TP to RM33.85 (from RM33.30) following audited account adjustments.

1Q19 broadly within. 1Q19 core PATAMI of RM124.5m consisted of 31%/28% of our/consensus estimates. We deem this to be broadly inline, due to a seasonally stronger 1H19 that was driven by Chinese New Year festivities. Additionally, there could potentially be further forward-buying from distributors, pre-sugar tax implementation in Apr 2019. No dividend was declared, as expected.

YoY, 3M19 sales of RM1.01b was flattish as a slightly weaker F&B Malaysia segment (-<1%), probably dented by lower export contribution, was mitigated by improvements in F&B Thailand’s revenue (+3%). Core EBIT rose by 24% mainly thanks to better commodity prices (i.e. dairy commodities) while its Thailand businesses also benefited from higher export contribution and lower marketing spend. Following higher effective tax rate at 20.3% (+13.1ppt) and noncore adjustments, 3M19 core net profit of RM124.5m only registered a 7% growth.

QoQ, revenue grew by 7% following the seasonal weakness of the 4Q period. Core operating profit expanded by 60% on the back of greater efficiency from higher volume sales. This then translated to a 59% growth in 1Q19 core PATAMI.

Preparing the pipelines. The group recently announced RM30.0m in capex plans to expand production lines in anticipation of new product ahead, leaning towards healthier offerings. This appears to be in preparation of the coming sugar tax, which could result in a 3-5% increment in selling prices of products, which fall above the classified threshold. While we do not believe the resulting tax will not be overly detrimental to demand, new product ranges could work favourably as a means to improve market share. At the meantime, we believe attention should still be given to F&B Thailand which will still lead group profits in the medium-term, making up c.66% of YTD operating profits. Primarily involved in dairy products (i.e. condensed milk), the segment will be hinged against dairy commodity prices, which should continue to demonstrate expanded margins from better prices than the prior year (i.e. AMF prices record a 25% decline in prices from Dec 2017 to Dec 2018. Source: Global Dairy Trade).

Post-results, we tweak our FY19E/FY20E CNPs by 1.5%/1.1% following our model updates for FY18 audited results.

Maintain MARKET PERFORM with a higher TP of RM33.85 (from RM33.30). Our TP is based on an unchanged 30.0x FY19E PER (+1.0SD over the stock’s 3-year mean). Our call is premised on the rich valuations ascribed to large-cap F&B stocks in lieu of their sustainable and less volatile operating environment as opposed to other industries. However, dividend could be less exciting with low anticipated yields of c.2%. Nonetheless, the group’s strong operating cash position could fund further operational enhancements if needed.

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

Source: Kenanga Research - 4 Feb 2019