1H19 core PATAMI of RM235.0m (+7%) is above estimates, thanks to better-than-expected contributions from Thailand operations. An interim 27.0 sen dividend is deemed to be within. Going forward, it is likely that F&B Thailand will continue to drive the group’s earnings on stronger demand growth and better cost environment on a less optimistic Malaysian scene. Maintain MP and TP of RM33.85 for now, pending updates from today’s briefing.

1H19 came above. 1H19 core PATAMI of RM235.0m was above our/consensus expectations, making up 59%/54% of respective fullyear estimates. The positive deviation was due to a stronger-thanexpected expansion in margins from F&B Thailand’s operations. An interim dividend of 27.0 sen declared was as expected. We anticipate a full-year payment of 66.0 sen in FY19.

YoY, 1H19 sales of RM2.04b (+4%) was led by a 10% increase in F&B Thailand revenue against a flattish decline in F&B Malaysia sales. Core EBIT rose by 23%, again led by F&B Thailand which saw higher operating margin at 21.5% (+5.3ppt), likely driven by better product mixes, possibly export contribution and lower input cost exposure. F&B Malaysia’s operating margin was maintained at 7.4%. Following higher effective taxes of 21.1% (+13.4ppt), core PATAMI closed at RM235.0m (+7%).

QoQ, revenue grew by 2%, as Malaysian numbers dipped from an earlier Chinese New Year period but was supported by the same stronger F&B Thailand’s business in 2Q19. The drag in core PATAMI by 11% was mainly due to the compressed EBIT margin in F&B Malaysia, from higher production cost and A&P spending.

Preparing the pipelines. The group had previously announced RM30.0m capex to expand production lines in anticipation of new products 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’s market dynamics are more vibrant in Thailand, being a highly localised ingredient and this could sustain the group’s presence there.

Post-results, we leave our FY19E/FY20E numbers unchanged for now, pending updates from today’s results briefing. However, there are likely to be upwards-biased adjustments to our estimates, mainly from F&B Thailand’s improving business.

Maintain MARKET PERFORM with TP of RM33.85. 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 - 30 Apr 2019