Post-meeting, we reiterate our optimistic outlook on the group as we expect FY20 to see a greater harvest of its rationalisation efforts. This is driven by: (i) new SKUs to lift sales moving forward and (ii) on-going distribution streamlining and prudent A&P spending, coupled with (iii) more favourable locked-in coffee prices. Maintain OUTPERFORM with higher TP of RM2.45 (from previously RM2.30) following earnings upgrade.

New SKUs gaining traction. Apart from the group’s core brands (e.g. Ali Café and Ah Huat) holding the ground steady on the local front, we gathered that the group’s newly rolled out products such as Warung Range products, Ah Huat Hainan Tea and Ah Huat TehC may have successfully tapped into their respective targeted markets. Given its favourable reception so far, we believe the sales momentum could sustain moving forward, which would further strengthen its product portfolio.

MENA region remains robust. Exports account for c.51% of the group’s total sales, with the MENA region being the main market. We understand that the coming quarter is likely to see stronger contributions as the upcoming winter season could lead to forward buying. This is further enabled by new distribution partners with wide networks and financial leverage. With its volumes now solely supported by its manufacturing plant in Johor, we do not discount the possibility of the group expanding its manufacturing processes to the MENA region.

Plenty left to reap. While the group has already started seeing the fruition of its rationalisation exercises in FY19 with core PATAMI jumping 42%, we reckon that FY20 may be poised to see a greater harvest of the efforts. This is stemming from: (i) aforementioned new products to drive sales moving forward, (ii) on-going rationalisation of its sales distribution network and more prudent A&P spending, coupled with (iii) favourable locked-in price for coffee which bode well for further margins improvement.

Post-meeting, we nudged our FY20-21E earnings upwards by 6-5% as we account for: (i) stronger sales growth driven by new SKUs, coupled with (ii) better margins on more favourable raw material costs.

Maintain OUTPERFORM with a higher TP of RM2.45 (from RM2.30) following an earnings upgrade. Our TP is based on an unchanged FY21E PER of 20.0x, (in-line with its 3-year mean). All-in, we still like the company for its earnings recovery story and attractive growth trajectory driven by its fresh strategies. A decent dividend yield of c.4% could also offer some degree of defence amidst the current market uncertainty.

Risks to our call include: (i) lower-than-expected sales, (ii) higherthan-expected commodity and marketing costs, and (iii) lower-thanexpected dividend payments.

Source: Kenanga Research - 17 Oct 2019