Post-meeting, we are reassured on its overall performance, helmed by: (i) recovering catch rates supporting marine products manufacturing (MPM), (ii) growing demand in regional integrated livestock farming (ILF), and (iii) on-track FamilyMart expansion. While we raise our earnings for more optimistic MPM results, steep valuations could suggest that positives are already priced in. Maintain UNDERPERFORM with a higher TP of RM6.05 (from RM5.70).

Sailing favourably. In the last 9M19, the MPM segment saw a 9% YoY revenue growth but with a PBT expansion of 19% YoY on 18.5% margin (+3.8ppt) in 3Q19. The segment’s performance was previously dampened by poor weather conditions, which lowered catch rates, leading to the need to purchase from suppliers to make up the poorer yields. For illustration, MPM’s 3Q16 PBT margin of 21.1% progressively declined to 10.5% in 4Q18, albeit also owing to seasonal factors. With recent improvements in weather and fish breeding conditions, management expects near-term results to be sustained by better production costs. We believe that facility upgrades in Hutan Melintang (i.e. chilled surimi-based production) and new aquaculture initiatives could also contribute to the segment’s growth. Slow drips for palm oil. Despite a highly matured estate in Malaysia and Indonesia and anticipated fresh fruit bunch (FFB) production growth of 20%, palm oil activities (POA) are facing margin pressures from poor CPO prices. This was reflected in 9M19’s 24% YoY decline in POA revenue and a 46% YoY decline in PBT, translating to margin of 4.4% (-1.8ppt). While our in-house view forecasts an average CY19 CPO price of RM2,400/mt, management takes a more cautious view of RM2,000-RM2,200/mt for its FY20, likely owing to the year average only registering at RM2,005/mt to date.

ILF backed by regional expansion. The local poultry scene is expected to be challenging on volatile egg prices. While commodity prices had trended higher, the group’s feed mills operation had helped to mitigate some cost pressures. Management plans to tap on meeting the expanding demand in Vietnam and Indonesia on top of the more stable market pricing. We recently visited the group’s layering farm in Tay Ninh, Vietnam, where plans to double output there (up to 1.8m eggs/day) by FY2022 could boost the segment. The group also looks to increase the egg and day-old-chick production in Indonesia by 20% and 50%, respectively. The FamilyMart chain appears to have achieved the targeted 90 outlets in FY19, on track of the FY22 target of 300 locations. The group will continue branching out beyond the Klang Valley, with potential openings in Johor, Ipoh and Melaka. Results from here are expected to be segregated by segment in FY20.

Post meeting, we take comfort in the growth opportunities in the key MPM and ILF segments. As POA only contributes marginally to group performance (c.5% of 9M19 PBT), we are not overly concerned by its soft outlook. We raise our FY19E/FY20E earnings by 7.6%/6.2% mainly on better margin assumptions for MPM, which should continue to be the group’s primary earnings contributor (c.58% of 9M19 PBT).

Maintain UNDERPERFORM with a higher TP of RM6.05. Our valuation is based on higher earnings estimates on an unchanged 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 of c.1% (vs. peers’ average of 3-4%), and (ii) slower earnings growth expectation of c.6-7% (vs. peers’ average of 10%).

Source: Kenanga Research - 23 Apr 2019