Post-briefing, we feel neutral on the group’s near-term prospect. While product innovations are expected to propel the group moving forward, robust demand growth from its Thai operation is expected to be slightly overshadowed by the competitive local scene. We also reiterate our view on the dairy and crop farm venture as a longer-term positive. Maintain MP with lower TP of RM35.15 (from previously RM36.60) following downwards earnings adjustments.

Let’s drink more fresh milk. As the recently announced plan to venture into an integrated dairy and crop farming project with a total CAPEX of RM650m is still subject to approval, the group is reluctant to commit on the potential contribution that it could yield. Nonetheless, we are positive on the long-term benefits from this venture as we believe the facilities would allow the group to expedite its growth within the fresh milk segment (which currently takes up low single-digit percentage of total revenue), on the back of more competitive cost advantages. With majority of the dairy consumed in Malaysia made almost entirely from imported milk powder, we believe the group’s ambition in the fresh liquid milk sector also jives with the shift in consumer trend towards a healthier and sustainable food future, as fresh milk is supposedly a healthier option than powdered milk. All-in, we reiterate our view with this being a longer-term prospect, hence ruling out any earnings accretive development over the next two years.

Upbeat on Thai operation. To recap, the group’s Thailand F&B operation saw inspiring growth in FY19, with revenue and operating profit jumping 11% and 40% YoY, respectively. Making up c.70% of the group’s total operating profit, the group’s Thai operation is expected to continue leading growth moving forward. This is premised on the group’s continuous product innovations coupled with its strong brand presence as the market leader for its Dairy segment (c.80% of market share), as we understand that bulk of the products are among the key ingredients for Thailand’s traditional cuisines. We gathered that management is aiming for 6% to 7% top-line growth in FY20 (versus our more conservative 4% to 5% growth assumption).

Local scene remains competitive. While the first quarter (4QFY19) with sugar tax saw minimal disruptions to sales with close to 90% of the group’s portfolio being reformulated to “healthier options”, the local scene is poised to remain challenging in view of the competitive landscape within the ready-to-drink beverage and dairy segments. On the flipside, the group is planning to strengthen its presence within the MENA region through establishing a new subsidiary in Dubai. With operations likely to commence earliest by 1Q20, the group has targeted to achieve MENA region’s export revenue of RM100m by CY20. This is out of the group’s total targeted export revenue of RM800m by CY20 (versus FY19’s c.RM693m, implying a targeted growth rate of 15%).

Maintain MARKET PERFORM with lower TP of RM35.15 (from RM36.60). Post-briefing, we tweaked our FY20E/FY21E earnings downwards by 3.7%/2.5% to account for more conservative growth assumptions for Malaysia to -0.5%/0% (from 1% to 2% previously). With an ascribed 30.0x FY20E PER (closely in line with +1.0SD over the stock’s 3-year mean), we deem our valuation to be fair at this juncture, premised on the premium valuations attached to large-cap F&B stocks in lieu of their defensive earnings. Yet, dividend could be a slight dampener with anticipated low yield of c.2%.

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

Source: Kenanga Research - 7 Nov 2019