9M19 core PATAMI of RM21.0m (-5%) and 1.7 sen dividend deemed as broadly within expectations. A stronger 4Q19 set of results is expected from a recovery in export sales. Other prospects for the group include healthier client profiles, lower production costs and leaner production methods. Maintain OUTPERFORM and TP of RM1.65.

9M19 within expectation. 9M19 core net earnings of RM21.0m is deemed broadly within our/consensus estimates, making up 68%/64% of respective full-year forecasts. We anticipate a stronger 4Q19 to be driven by better operating margins and export sales. A 1.7 sen interim dividend was declared, for YTD dividend of 3.4 sen. We also deem this to be within our anticipated full-year payout of 7.5 sen (implying a c.98% payout).

YoY, 9M19 turnover of RM258.4m fell by 20% following weaker sales from both domestic and export markets. This could be due to the rationalisation of the group’s distribution network which may have limited orders and outreach. In spite of the lower top-line, PBT grew by 35% with margin of 10.8% (+4.4ppt) thanks to improvements in input costs (namely coffee and dairy products) and streamlined operating landscape. 9M19 core PATAMI registered at RM21.0m (-5%), following higher effective taxes and adjustments to one-off items (i.e. forex gains/ losses).

QoQ, 3Q19 sales decreased by 6% mainly due to a shortfall in export sales (-12%) from the change in distributorship. Domestic sales during the quarter were flattish. Thanks to the same better operating environment mentioned above and lower effective taxes, 3Q19 core PATAMI improved to RM6.5m (+4%).

Inspiring a finer brew. Following the rationalisation exercise, we believe the group is poised to experience stronger results backed by: (i) better hedged positions, and (ii) overall easing commodity trends. We also take comfort with the present commodity price trends which appear more stable as compared to previous years. Management is hopeful to achieve its desired distribution base soon, whereas previously, sales through certain networks led to a drag in profitability. In relation to the plans to expand production facilities in the MENA region, the group continues to be mindful on the trade policies within the region to a point where it would be more economically viable to produce products there as opposed to importing from Malaysia.

Post-results, we leave our FY19E/FY20E earnings unchanged.

Maintain OUTPERFORM and TP of RM1.65. Our TP is based on an unchanged 17.0x FY20E PER, at -1SD over its 3-year mean. We believe our valuation is undemanding, being at a discount to the implied privatisation valuation of OLDTOWN at c.19x 1-year Fwd. PER, while the discount was previously premised on PWROOT’s more volatile outlook. On top of a rebound from an unfavourable operating environment resulting in meaningful earnings growth potential, the stock also provides solid dividend yields of 5.2%/6.3% for FY19/FY20. For comparison, large-cap F&B players on average provide dividend yields of c.2.0%.

Risks to our call include: (i) lower-than-expected sales, (ii) higherthan-expected commodity and marketing costs, and (iii) lower-than expected dividend payments.

Source: Kenanga Research - 27 Feb 2019