1HFY20 CNP of RM24.7m (+67% YoY) came in exceeding expectations on better-than-expected cost efficiency. Postresults, we nudged our FY20E/21E earnings upwards by 12%/6% followed with a higher TP of RM2.60 (from RM2.45). We maintain our OUTPERFORM call though the share price had surged c.70% YTD, as we continue to like the group for its earnings recovery story, sturdy balance sheet and decent dividend yield of c.4%.

Beat expectations. 1HFY20 CNP of RM24.7m came in above expectations at 56% and 57% of our and street’s full-year forecasts, respectively. We believe the positive deviation is largely driven by betterthan-expected cost efficiency. A declared dividend of 3.0 sen (YTD: 5.0 sen) is also deemed to be within expectations, against our full-year estimates of 9.0 sen.

Great first half of the FY. The group posted a solid 67% YoY growth in its 1HFY20 CNP. This is riding on the back of an improved net margin which expanded 4.3ppt to 12.7%, thanks to: (i) greater operational efficiencies post-rationalisation exercises, (ii) better comparative production costs due to more favourable locked-in coffee bean prices, coupled with (iii) lower ETR incurred (12.7%, -4.8ppt YoY). Notably, revenue also rose, by 10%, backed by stronger sales from both local (+13%) and export (+7%) markets. For the individual quarter of 2QFY20, CNP grew by 2-fold to RM13.0m, similarly due to the aforementioned reasons.

QoQ, 2QFY20 CNP was higher by 11%, largely attributed to higher sales (+6%) and better operational efficiencies which saw EBIT margin expanding 2ppt to 16.1%.

Back to the good old days. Post-results, we reiterate our sanguine outlook on the group as FY20 is likely to see greater harvest from its relentless operational streamlining exercises to drive profit growth and efficiency. This is led by (i) product innovations to propel demand from local and export markets, (ii) better distribution outreach and efficiency from the continuous rationalisation of its sales distribution network, (iii) more prudent A&P spending which emphasises on ROI, and (iv) more favourable locked-in price for coffee beans. While the group derives c.52% of its total sales from its export markets (with MENA being the main market), we gathered that the upcoming quarters are expected to be buoyed by robust export sales as the upcoming winter season could lead to forward buying activities.

Post-results, we nudged our FY20E/FY21E earnings upwards by 12%/6% to account for more generous margins and lower tax rates.

Maintain OUTPERFORM with a higher TP of RM2.60 (from previously RM2.45). Our TP is premised on an unchanged 20.0x FY21E PER, which is in-line with its 3-year mean. We continue to like the group for its earnings recovery story, sturdy balance sheet coupled with a solid dividend yield of c.4% (versus large-cap F&B players’ mean of c.2%). Though the share price had surged c.70% YTD, we believe there is still further upside, backed by the foresaid positives.

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

Source: Kenanga Research - 26 Nov 2019