FY19 CNP of RM419.8m (+5%) came in within expectations. Going forward, we expect the group’s booming F&B Thailand business to continue taking the lead, riding on its strong brand presence as a market leader. While the newly implemented sugar tax saw minimal disruptions to sales, the local scene is poised to remain challenging in view of the competitive landscape. Maintain MP with unchanged TP of RM36.60, pending updates from today’s briefing.

As expected. FY19 Core Net Profit (CNP) of RM419.8m came in within expectations at 97% of both our and consensus’ forecasts. Nonetheless, the declared dividend for the quarter of 33.0 sen (full year: 60.0 sen) was below our expected 66.0 sen total payout due to a lower pay-out ratio of 54%.

Stronger full year results. FY19 CNP rose 5% to RM419.8m, largely bolstered by: (i) robust revenue growth from its Thailand operation (+11%) on favourable forex, coupled with (ii) improved core EBIT margin (+1.8 ppt) of 13.0%, thanks to overall favourable input prices (i.e. sugar and packaging material) in tandem with higher operational cost savings from its Thailand operations. F&B Malaysia, however, registered flattish revenue contributions. Nonetheless, the foresaid merits were partially offset by high ETR of 23% (versus FY18 of 9%) due to the expiration of tax incentives. For the individual quarter of 4Q19, CNP slipped 3% YoY to RM76.0m, dampened by overall steeper operational expenses (+10%), coupled with marginally softer local sales (-2%) post-festive season and sugar tax which began on 1 July 2019.

QoQ, the 33% drop in CNP is mainly attributed to weaker revenue (-9%) from both Malaysia and Thailand as demand took a breather post-festive season. Overall higher marketing investments in preparation for new product launches and re-launches which saw operating margin contracting 5.3ppt to 9%, also contributed to a poorer bottom-line.

Thanks, Thailand. Moving forward, we expect the group to continue to be buoyed by its booming Thai operation, which takes up c.70% of operating profit. This is stemming from the group’s strong brand presence as a market leader for dairy products (i.e. sweetened condensed and evaporated milk segment), which should see its demand being further supported by continuous product innovations. While the first quarter (4QFY19) with sugar tax saw minimal disruptions to sales, the local scene is poised to remain challenging in view of the competitive landscape within the ready-to-drink beverage and dairy segment. Notably, the group has announced its plans to venture into upstream fresh milk production. Despite minimal near-term impact, we are positive on the long-term benefits from this venture as this would allow the group to have a firmer grasp on its fresh milk processing margins, consequently sharpening its competitive edge over peers in the longer run.

Pending-updates from today’s briefing, we leave our earnings assumptions for FY20E unchanged for now with possible downside adjustments. At the same time, we introduce our FY21E numbers.

Maintain MARKET PERFORM with TP of RM36.60. 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 the 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 - 6 Nov 2019