We came back from an analysts’ briefing (with c.70 attendees) feeling reassured on the group’s upbeat outlook. Apart from new SKUs and fresh marketing initiatives to propel growth, we opine the group will benefit from: (i) controlled raw material costs, (ii) prudent A&P spending which emphasises on ROI, and (iii) continuous distribution streamlining. Maintain OUTPERFORM with higher TP of RM2.75 as we lower our tax rate assumptions on better guidance.

Venturing into 3-in-1 coffee and latte markets. Moving into 2HFY20, management has identified three key initiatives to propel growth. Firstly, the group is tapping into the mainstream 3-in-1 coffee and latte markets through the introduction of a new range called “Frenche Roast”. Four new SKUS will be offered under the range which is earmarked to be launched in 4QFY20. While this sub-sector tends to yield lower margins when compared the group’s core functional coffee product, we opine that this would aid in firming up the group’s portfolio as a beverage player by tapping into a previously untapped target audience. Besides that, upcoming festive sales look to be backed by new CNY promos for the Ah Huat’s range through an upgraded version of the popular Ah Huat’s lucky tumbler and Angpao. Lastly, the group is also rebranding its core Oligo brand with the inclusion of a new mascot, packaging and marketing initiatives, which aims to retain and attract younger target customers.

Regional push. Exports account for c.51% of the group’s total sales, with the MENA region being the main market. Recap that the stronger export sales seen in 1HFY20 (+7.3%) is largely led by robust growth in the MENA region, especially from Qatar and Saudi Arabia. While Gulf Cooperation Council (GCC) regions typically offer higher margins, the group is looking to venture into the non-GCC region moving forward, which should be supported by potential investment in a ready factory with an estimated capex of RM30.0m (inclusive of land, machineries and working capital). Meanwhile, China remains an e-commerce market and a longer-term strategy for the group with key products being Ah Huat range and Ali Café.

Managing costs. With the anticipation of new products in tandem with fresh marketing initiatives ahead of CNY, the group reassured that they will remain prudent on its A&P spending by emphasising on ROI, with a guidance of A&P taking up 14-18% of top-line in FY20. We also take comfort in the controlled raw material costs as the group managed to lock in favourable coffee bean prices until March 2021, and is currently in the midst of locking in creamer prices (currently already c.40% requirement already locked in). All-in, coupled with continuous operational streamlining and a guided lower tax rate of c.12-14% on tax incentives (versus FY19 of 24%), we believe that the group is poised for margin expansion moving forward.

Maintain OUTPERFORM with a higher TP of RM2.75 (from RM2.60) on a FY20E/FY21E earnings upgrade of 4%/6% as we pencilled in lower tax assumptions. Our TP is based on an unchanged FY21E PER of 20.0x, (in-line with its 3-year mean). All-in, we continue to like the company for its earnings recovery story and attractive growth trajectory driven by fresh strategies. A decent dividend yield of c.4% could also offer some degree of defence against the current market uncertainties.

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 - 28 Nov 2019