We reaffirm our positive stance post-meeting, premised on the belief that the group’s prospect remains sturdy on: (i) greater operational efficiency, (ii) better cost environment, and (iii) innovative offerings to propel growth, amidst new challenges in UAE and Saudi in the form of sugar taxes. We expect 3QFY20 CNP to come in at c.RM12-13m, bringing 9MFY20 CNP to c.RM36-38m (versus our full-year forecast of RM51.4m). Reiterate OUTPERFORM at TP of RM2.75.

3QFY20 results preview. Earmarked to be released during the last week of February, we are expecting the group’s 3QFY20 CNP to come in at c.RM12-13m (QoQ -7%/0%, YoY +86%/+101%), bringing 9MFY20 CNP to c.RM36-38m (YoY +71%/+81%) versus our full-year forecast of RM51.4m and consensus’ RM48.6m. While the home ground remains anchored by steady demand for its core brands and a seasonal CNY boost from its “Ah Huat” products range, we believe the quarter will likely be largely driven by its export business, especially from the MENA region, which takes up c. 43% of the group’s total sales. We attribute this to stronger sales from the non-GCC region, riding on the back of a wider outreach through its new distributorships. An interim dividend payout of 2.0 sen is expected, whereas our FY20E total payout of 9.0 sen translates to a dividend yield of c.4%.

Sugar tax in the UAE and Saudi. As of 1st of December 2019, the UAE Cabinet has levied a 50% excise tax on sugar sweetened beverages, be it in the form of a beverage of a concentrate, powder or extract or any product that may be converted into a beverage. This is anticipated to put some pressure on the group’s export business in the region as the imposed taxes will be passed on to consumers. In relation to this, management represented that certain measures are already in place to counter the price hike and keep demand intact. We reckon possible solutions could be in the form of more sugar free products or cheaperpriced alternatives to mainstream products. Leveraging on its brandstickiness there, we believe the group’s strategies to potentially release new products could be fruitful to counteracting changes in consumer spending. We estimate sales in the UAE and Saudi to make up c.55% of the group’s exports (or c.29% of total sales).

Key positives remain intact. Despite the disturbance in the Middle East, we are still fairly optimistic on the group’s prospect. This is premised on our belief that the group is en route towards greater operational efficiency, which is further backed by a better cost environment driven by: (i) prudent A&P spending focusing on ROI, (ii) favourable locked-in raw material prices, and (iii) potentially lower taxes from overseas tax shelter. Furthermore, sturdy top-line performances are expected to be further boosted by the group’s innovative offerings to penetrate new markets, for example the upcoming “Frenché Roast” range (to be launched within 4QFY20) is targeted at the growing 3-in-1 and Latte markets.

Post-meeting, we made no changes to our numbers.

Maintain OUTPERFORM with TP of RM2.75. Our TP is based on an unchanged FY21E PER of 20.0x (in-line with its 3-year mean). All-in, we continue to favour the name for its attractive growth trajectory, driven by its sturdy fundamentals and fresh strategies. A decent 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 - 20 Jan 2020