FY18 core net profit of RM649.5m (+1%) came below estimates, as marketing spend and taxes were higher-thananticipated. Total dividend of 280.0 sen is within expectation. The group should see favourable input cost trends while operational efficiencies could come in the medium-to-long term. We make no changes to our earnings estimates for now, pending further details from a briefing today. Maintain MP and TP of RM146.50.

FY18 below. FY18 core net profit of RM649.5m came below our/consensus estimates, making up only 90%/92% of respective fullyear estimates. The miss was mainly due to higher-than-expected operating expenses (likely from more aggressive marketing strategies) and higher taxes from the lapse of tax incentives. A final dividend of 140.0 sen was declared, for a full-year payment of 280.0 sen. This is within our earlier expectations of 290.0 sen (which was at c.95% anticipated earnings payout).

YoY, 12M18 revenue of RM5.52b (+5%) was driven by improved sales in both domestic and export fronts. Demand growth continued to be driven by the introduction of new product innovations. Gross profits increased by 10% (GP margins at 38.7%, +1.6ppt) on the back of better commodity prices. In spite of this, core NP for 12M18 was flattish at RM649.5m (+1%) mostly due to higher effective tax rates of 24.8% (+3.9ppt) from the lapse of tax incentives alongside adjustments for a RM9.4m one-off gain from the disposal of the group’s Chilled Dairy business.

QoQ, 4Q18 sales fell by 6%, possibly due to a higher spending environment in 3Q18, which saw the “tax-holiday” season. Still, gross profit margin saw some improvement at 39.1% (+0.2ppt) as commodity averages trending favourably. 4Q18 core net profit declined by 17% to RM114.4m, owing to the same abovementioned factors.

Building upon sustainability. Thanks to its persistent hedging practices, we continue to anticipate better input costs as past global price trends appear to be in favour of food manufacturers. Operationally, measures to improve operational efficiency came in with the commissioning of a new National Distribution Centre and also the disposal of the group’s Chilled Dairy business. Recall that proceeds from this disposal was earmarked to fund the consolidation of the group’s Milo production facilities which could enable further innovation and production of the brand’s products, which should materialise in the medium-to-long term. However, being capital intensive, operating at a less-than-optimal level could result in large overhead costs and undermine overall profitability.

Post-results, we leave our FY19E assumptions unchanged, pending updates from management in a results’ briefing today, with possible negative revisions. Our anticipate earnings growth of c.26% for FY19 is presently based on: (i) continual weakness in commodity exposure, (ii) leaner operating costs, and (iii) lower effective tax rates of c.22%. We also introduce of FY20E numbers.

Maintain MARKET PERFORM and TP of RM146.50. Our call is based on an ascribed valuation of 42.0x FY19E PER which is closely in line with the stock’s +1.5SD over its 3-year mean. The persistently steep valuation is largely attributed to the defensiveness of its business model and positioning as one of the very few large cap F&B stock, as well as being a FBMKLCI index member, warranting above-mean valuations for now. Still, dividend returns of 2.3% may seem uninspiring to certain investors.

Risks to our call include: (i) stronger/weaker-than-expected sales, (ii) more/less favourable commodity prices, and (iii) higher/lower-thanexpected operating costs.

Source: Kenanga Research - 27 Feb 2019