1Q20 PATAMI of RM50.6m (+15%) and the absence of dividend came in within expectations. Moving forward, earnings are expected to be largely driven by its stronger marine segments, on the back of more favourable weather and fish breeding conditions. Meanwhile, FamilyMart operations could be profitable in FY20. Post-results, maintain UP with higher TP of RM6.30 (from RM6.05) as we roll forward our valuations base year to FY21E.

No surprises. With 1Q being a seasonally weaker quarter, 1Q20 PATAMI of RM50.6m came in within expectations at 21%/20% of ours and consensus’ estimates, respectively. No dividend was announced, as expected.

YoY, 1Q20 PATAMI of RM50.6m grew 15%, anchored by stronger sales and profit contributions from the Marine Product Manufacturing (MPM) segment’s helmed by its fishmeal and surimi based products. The robust performance from the MPM segment (+52% PBT) supported: (i) poorer Palm oil activities (POA) results (-63% PBT) which was dragged by the prevailing weakness in CPO prices, and (ii) weaker integrated livestock segment (ILF) (-19% PBT) owing to poorer feed meal margins which offset its strong sales growth in operating regions.

Sequentially, 1Q20 earnings jumped by 17%, mainly driven by its studier MPM segment (+36% PBT) versus a seasonally weaker 4Q which was impacted by monsoon season. On the flip side, the group’s POA business continued to see a decline in PBT (-90%), depressed by lower CPO prices and lower contribution from its associate (Boilermech) while ILF business saw a -13% decline in PBT due to frailer peninsular poultry contribution.

Time to go fishing. Moving forward, the group’s earnings are anticipated to be largely buoyed by its MPM segments, on the back of more favourable weather and fish breeding conditions. Moreover, the group’s persistent efforts to upgrade its Hutan Melintang facility, surimi plants, fleets and new aquaculture initiatives could only further enhance the growing segment. While its ILF segment has shown a rather volatile earnings track record, we believe that there could still be more growth opportunities in its regional bases (i.e. Vietnam and Indonesia) where the group looks to ramp up production capacity, banking on their larger population. On the other hand, the FamilyMart convenience store chain is expected to generate profits by FY20, having already opened c.120 stores to date.

Post results, we made no changes to our earnings forecasts.

Maintain UNDERPERFORM and higher TP of RM6.30 (from RM6.05, previously). Our valuation is based on an unchanged 40.0x PER (within the stock’s +0.5SD over its 3-year mean PER) as we roll forward our valuation base year to FY21E. 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) its low ROE (vs. peers of up to +100%).

Risks to our call include: (i) significant improvement to MPM sales, (ii) significant uptick in palm oil prices and sales volume, (iii) better-thanexpected demand of poultry products abroad.

Source: Kenanga Research - 29 Aug 2019