9M19 CNP of RM343.7m (+8%) and the absence of dividend came in broadly within expectations. Moving forward, we expect earnings to remain buoyed by its F&B Thailand business, premised on the group’s strong brand presence in tandem with growing demand for its dairy products. Meanwhile, minimal impact is anticipated from the sugar tax (effective from July 2019) due to the immaterial net increment. Maintain MP with unchanged TP of RM36.60.

Broadly within. 9M19 Core Net Profit (CNP) of RM343.7m came in broadly within expectations at 79% and 81% of our and consensus estimates, respectively, with 4Q being a seasonally weaker quarter due to the lack of festivities. The absence of dividend announced for the quarter (YTD: 27.0 sen) was also within expectations.

Overall better results. YoY, 9M19 CNP grew 8% to RM343.7m, largely driven by (i) slightly better sales in Malaysia F&B operations (+1%) and stronger growth in Thailand F&B operations (+13%), coupled with (ii) favourable input costs (i.e. sugar, milk and packaging material) which saw operating margin expanding to 14% (+3 ppt). Apart from healthy beverage sales from festive events, the marginal operating profit improvement in Malaysia operations (+2%) was also sustained by effective route-to-market executions, which helped to boost its competitive canned milk segment. Meanwhile, the group’s Thailand operations continue to demonstrate commendable operating profit growth of 54%, likely underpinned by its strong and growing brand presence for its dairy products (i.e. condensed milk) and more favourable cost exposure, which saw its margin rising 21% (+6 ppt).

QoQ, higher CNP of RM113.9m (+7%) was largely driven by stronger performance from its Malaysia operations, with operating profit soaring 87% to RM52.7m on stronger Hari Raya festive sales. Nonetheless, this is shadowed by weaker Thailand F&B business (-4% operating profit) for the quarter, dragged by more costly dairy and packaging material prices.

Thai operations continue to sweeten. Moving forward, the group’s earnings are expected to be largely buoyed by its F&B Thailand business, which takes up c.69% of YTD operating profit. Albeit with volatile commodity prices (i.e. dairy) which may take a toll on the segment’s margins, we believe the Thai operations will continue to remain sturdy by leveraging on its strong brand presence as a market leader for the growing dairy products (i.e. sweetened condensed and evaporated milk segment). On the other hand, while the group has reformulated majority of their beverages in anticipation of the sugar tax which took effect from July 2019, we do not believe the resulting tax will be overly detrimental to demand as we view the net increment to be immaterial.

Maintain MARKET PERFORM with TP of RM36.60. Post-results, no changes were made to our earnings forecasts. With an ascribed 30.0x FY20E PER (closely in line with +1.0SD over the stock’s 3-year mean), we deem our valuations to be fair at this juncture, premised on the premium valuations attached to large-cap F&B stocks in lieu of their earnings defensiveness. Yet, dividend could be a slight dampener with anticipated low yield of c.2%.

Risks to our call include: (i) slower-than-expected growth in Thailand F&B business, and (ii) higher/lower-than-expected operating costs

Source: Kenanga Research - 7 Aug 2019