1Q19 earnings of RM7.7m (+15%) came above our estimate but within consensus, owing to our highly cautious cost assumptions. The absence of dividend was expected. While top-line performance would still be subject to seasonality, easing input prices (i.e. PET) could be a saving grace. Upgrade to MARKET PERFORM with a higher TP of RM2.40 (from RM1.90) on rolled-over valuations on top of higher earnings adjustments.

1Q19 above estimate. 1Q19 Net Profit of RM7.7m is deemed above our expectation but within the consensus, making up 31% and 29% of respective full-year estimates. The positive deviation was due to our overly bearish assumption on PET resin prices against margins. No dividend was declared, as expected.

YoY, 3M19 sales grew by 15% to RM95.1m, as volume was spurred by higher demand from festivities in addition to higher average selling prices, likely in relation to the 5% sales tax hike imposed in January 2019. However, group EBITDA only rose by 4% as margin (14.4%, - 1.6ppt) was possibly eroded by higher logistics cost in relation to the higher sales registered. Still, aided by a lower effective tax rate of 22.6% (-5.6ppt), net earnings closed at RM7.7m (+14%).

QoQ, 1Q19 revenue improvement of 11% could have been attributed to 4Q18’s weaker demand post the heavier consumer spending during the “tax holiday” season. Thanks to the recovered sales volumes and more favourable production cost (i.e. PET resin), 1Q19 Net Profit surged 128%.

Out of the soft patch? While the recent boost to sales numbers appears encouraging, there could be an easing from the ongoing fasting season and fewer sporting events to stimulate demand in the near-term. On the flipside, the group’s trading business, namely in Guangzhou, appears to be demonstrating healthy growth numbers following its adoption of more engaging marketing strategies. While still registering losses, management is hopeful that it could turn around when achieving better economies of scale from a larger volume base. Further down the road, the group still has in its pipeline the construction of an automated warehouse by FY20, to inject new efficiencies and capabilities, bolstering its earnings potential.

Post results, we raise our FY19E/FY20E earnings by 11.1%/11.5% mainly on better margins assumption from soft PET cost.

Upgrade to MARKET PERFORM (from UNDERPERFORM) with a higher TP of RM2.40 (from RM1.90, previously). Our TP is based on a rolled over and higher FY20E EPS on an unchanged 16.0x Fwd. PER. The applied valuation is close to the -1.0SD of the stock’s 3-year mean, which we believe was dragged by input costs pressures against the group’s thin margins. However, progressive improvements into earnings could offset the negative perception regarding margins. Sentiment could improve with the commissioning of the group’s automated warehouse to drive efficiency, but is presently a long-term positive catalyst.

Risks to our call include: (i) better/weaker-than-expected sales, (ii) lower/higher-than-expected costs exposure, and (iii) faster/slower-thanexpected completion of the new automated warehouse.

Source: Kenanga Research - 31 May 2019