9MFY19 CNP of RM521.3m (-2.6%) coupled with a declared dividend of 70.0 sen (YTD: 140.0 sen) are deemed to be within expectations. Undermined by unfavourable forex fluctuations and costlier raw materials, the group is expected to be supported by new product innovations (which contribute >10% of top-line in FY18) moving forward. Post- results, maintain UNDERPERFORM with unchanged TP of RM128.00 as we made no changes to our forecasts.

Within expectations. 9MFY19 Core Net Profit (CNP) of RM521.3m (arrived at after stripping off one-off chilled dairy business disposal gain of RM19.8m) came in within expectations at 78% and 74% of our and consensus forecasts, respectively. A declared interim dividend of 70.0 sen (YTD dividend: 140.0 sen) is also deemed within expectations, versus our full-year forecast of 290.0 sen as we anticipate a lumpy payment typically seen in 4Q periods.

YoY. 9MFY19 CNP slipped 2.6%, no thanks to: (i) flattish revenue (+0.4%) against the backdrop of a stronger GST-free period in 3QFY18, dampened further by (ii) higher commodity prices and (iii) unfavourable forex which depressed gross margins by 1.2ppt to 37.4%. For the individual quarter of 3QFY19, CNP was up by 8.2% to RM149.0m, largely driven by: (i) lower taxes with an ETR of 22% versus 3QFY18’s 26%, and (ii) operational cost savings, which saw Core EBIT margin inching up by 0.5ppt. The foresaid merits helped offset the weaker revenue (-2.2%) as compared to a one-off spike in 3QY18 revenue following the tax-free period.

QoQ, 3QFY19 CNP rose 8.7%, as the robust top-line growth of 4.9% on the back of effective marketing efforts and product innovations was further supported by normalising raw material costs with gross margin standing at c.37%.

A year of costlier raw materials. Moving forward, we believe the group’s strong brand presence as one of the market-leaders will be further reinforced by its constant product innovations. Note that in FY18, the new product launches alone contributed >10% of the group’s top line, which we expect to see a continuation in FY19. Moreover, we are excited for the anticipated completion of its Milo plant in Chembong, Negeri Sembilan by the end of FY19, as it would contribute to better economies of scales and higher production capabilities in the longer- term. Nonetheless, recent global developments have caused a sense of uncertainty on macroeconomic factors (i.e. rising USD rates and higher commodity prices) which we expect to persist as a dampener, at least for this financial year.

Maintain UNDERPERFORM with an unchanged TP of RM128.00. Our call is premised on an unchanged 42.0x FY20E PER, being 0.5SD above the stock’s 3-year mean. The persistently steep valuation is largely attributed to the defensive quality of its business model and positioning as one of the very few large cap F&B stocks, as well as being a FBMKLCI index member, warranting above-mean valuations for now. Nonetheless, we believe the aforementioned merits have been largely priced in, and with an uninspiring dividend yield of c.2.0%, we are keeping our UNDERPERFORM call for now.

Risks to our call include: (i) stronger-than-expected sales, (ii) more favourable commodity prices, and (iii) lower-than-expected operating costs.

Source: Kenanga Research - 13 Nov 2019