9MFY19 CNP of RM78.7m (-16% YoY) and a declared dividend of 50.0 sen (YTD: 100 sen) are deemed to be within expectations. Moving forward, near-term earnings look to be shadowed by heavier cost pressures on unfavourable dairy price and forex trends. Nonetheless, new product launches and affordable pricing strategies may offer some reprieve. With an unchanged TP of RM54.60, the stock is now a MARKET PERFORM following a severe sell-down.

Within expectations. 9MFY19 core net profit (CNP) of RM78.7m came in within our and consensus expectations at 77% each of the respective full-year forecasts. Nonetheless, the declared dividend of 50.0 sen (YTD: 100 sen) is deemed to be within, versus our full-year dividend forecast of 160 sen.

YoY, 9MFY19 core earnings plunged by 16%, largely impaired by lower EBIT margin (-3.7ppt) of 13.5%. Profitability was weakened by costlier raw material and higher marketing spends. For the individual quarter of 3QFY19, CNP was down by 17% YoY to RM26.0m no thanks to a 5.1ppt fall in EBIT margin, similarly due to the foresaid reasons. This is in spite of an 8% jump in revenue, likely due to higher demand spurred by new products.

Sequentially, 3QFY19 CNP was up by 41%, thanks to (i) stronger sales momentum (+13%) driven by new products and the rise in milk consumption per capita, coupled with (ii) better EBIT margin of 12.9% (+2.2 ppts), possibly due to phasing of marketing spends.

Challenged by higher dairy prices. Moving ahead, the group appears to be able to preserve its top-line numbers on the back of fresh product innovations and strategic pricing strategies. Nonetheless, the more aggressive promotional prices could be a costly endeavour at this juncture. This is on top of our anticipation of higher raw material prices, mainly from Skimmed Milk Powder (SMP) – as of 19 Nov 2019, SMP traded at USD3,017/mt, +48% YTD (Source: Global Dairy Trade). Note that milk powders make up c.50% of the group’s input cost, being a mix of SMP and Anhydrous Milk Fats. While we gather that prices could be supported by the Friesland Campina group’s global procurement network with a 6-month inventory planning, the current rise in USD rates may spell further pressure to cost management in the near-term.

Post-results, we made no changes to our earnings forecast.

Upgrade to MARKET PERFORM with an unchanged TP of RM54.60 based on an unchanged FY20E PER of 31.0x (closely in-line with - 0.5SD over its 3-year mean). Despite a higher cost environment shadowing near-term profitability, we believe the share is fairly valued at this juncture, following the strong sell-down after the disappointing 2QFY19 results.

Risks to our call include: (i) weaker/better-than-expected sales, (ii) higher/lower-than-expected commodity prices, and (iii) weaker/better- than-expected domestic currency.

Source: Kenanga Research - 29 Nov 2019