1Q19 net profit of RM235.2m (+2%) is broadly within expectations. The absence of dividends is also as expected. Top-line continues to be backed by strong brands and product portfolio. Better operating efficiencies from previous capex are seen translate to better earnings. We tweak our earnings by -2.9%/-1.1% as we incorporate FY18 audited numbers. Maintain Market Perform and TP of RM137.00 (from RM138.50) on an unchanged 42.0x FY20E PER.

1Q19 broadly within. 1Q19 net profit of RM235.2m is broadly within our/consensus estimates. Although this makes up 31%/32% of respective full-year estimates, we had expected c.36% contribution from the first quarter due to seasonal strength. We believe the deviation was due to untimely recognition of expenses (i.e. sales and marketing). No dividend was declared, as expected. The group typically does not pay dividend in the first reporting quarter.

YoY, 3M19 revenue of RM1.5b grew slightly by 2%, probably boosted by stronger product portfolio for domestic and export markets. While gross profit similarly expanded by 2%, operating profit sized up by 6%, thanks to more efficient management of the supply chain and effective marketing approaches (3M19 operating margin registered at 22.2%, +1.0ppt). Following the lapse of tax incentives, effective tax rate increased close to the normal rate, at 24.8% (+3.2ppt), resulting in net profit to register at RM235.2m (+2%).

QoQ, 1Q19 sales grew by 8% from the Chinese New Year festivities during the quarter. Operating profit rose by 69% due to the same abovementioned reasons, leading to +8.1ppt in operating margin. 1Q19 core net profit was 106% higher than 4Q18, due to the previous quarter’s highly skewed tax payment at an effective tax rate of 31.2%.

Holding its ground. The stable production costs as per the results could indicate the effectiveness of the group’s hedging policies. Key commodities for the group are cocoa, sugar and coffee. With the commissioning of the group’s National Distribution Centre and disposal of the group’s Chilled Dairy business, leaner operating expenses could be expected going forward. Proceeds from the disposal to fund the consolidation of the group’s Milo plant could benefit the group in the longer term, enabling better economies of scale, production capabilities and innovation for the flagship brand.

Post-results, we tweak our FY19E/FY20E earnings by -2.9%/-1.1% as we incorporate FY18 results as per the annual audited report.

Maintain MARKET PERFORM with a lower TP of RM137.00 (from RM138.50). Our call is based on an unchanged 42.0x FY20E PER, closely in line with the stock’s +1.0SD over its 3-year mean. The persistently steep valuation is largely attributed to the defensive quality of its business model and positioning as one of the very few large cap F&B stocks, as well as being a FBMKLCI index member, warranting above-mean valuations for now. However, the low dividend yield of 2.2% may be unappealing to certain investors. Additionally, the lower margin outlook and tepid growth expectations may caution growthseeking investors to look elsewhere.

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

Source: Kenanga Research - 24 Apr 2019