1QFY20 CNP of RM131.9m (+6%) was within expectations. Moving forward, we expect the group’s earnings to be continued propel by product innovations and robust Thai operations. Following the recent sharp sell down, we upgrade the stock to OP with higher TP of RM35.20. This is premised on the group’s sturdy fundamentals as a resilient consumer counter, which could offer some form of defence amidst current market uncertainties.

Within expectations. 1QFY20 Core Net Profit (CNP) of RM131.9m came in within expectations at 31% of our and 30% of consensus’ forecasts. Note that 1Q historically takes up c.30% of the group’s full-year earnings. No dividend was declared, as expected.

Started the year with a bang. YoY, 1QFY20 CNP jumped 6% to RM131.9m, boosted by sustained robust performance from its Thai operation, with operating profit rising 12% on better sales and favourable forex. Nonetheless, this was partially offset by a weaker operating profit from F&B Malaysia (-7%) as stronger revenue locally (+6%) was mitigated by costlier dairy prices coupled with higher market spends for CNY and new product launches.

QoQ, CNP rose by a whopping 74%, on the back of: (i) robust performance from F&B Malaysia which grew 82% thanks to earlier CNY sales, (ii) better Thai operations which jumped 83% on phasing of marketing spends and sustained sales momentum, coupled with (iii) lower Effective Tax Rate (ETR) of 20% versus 24% in 4QFY19.

Solid Thai operations continue to support. While the group has shown its ability to weather through the sugar tax with the reformulation of its portfolio, the local scene is likely to remain competitive, especially in the dairies segment. Nonetheless, new product launches coupled with its booming Thai operation, which takes up c.70% of operating profit shall continue to anchor the group’s earnings moving forward. Notably, the group has announced plans to venture into upstream fresh milk production with the proposed land acquisition in Ladang Chuping. Despite minimal near-term impact, we are positive on the long-term benefits from this venture as we believe the facilities would allow the group to expedite growth within the fresh milk segment (which currently takes up low single-digit percentage of total revenue), on the back of more competitive cost advantages.

Upgrade to OUTPERFORM following recent sharp sell-down in lieu of uncertainties caused by the new coronavirus threat. This is followed by a higher TP of RM35.20 (from RM35.15) as we tweaked our FY21E earnings upwards by 0.2% following model updates for FY19 audited results. With an ascribed 30.0x FY20E PER (closely in line with +1.0SD over the stock’s 3-year mean), we deem our valuations to be fair at this juncture, premised on (i) the group’s sturdy fundamentals which could provide some form of support under the current market uncertainties, coupled with (ii) premium valuations attached to large-cap F&B stocks in lieu of their earnings defensiveness. Yet, dividend could be a slight dampener with the anticipated low yield of c.2%.

Risks to our call include: (i) slower-than-expected growth in Thailand F&B business, and (ii) higher-than-expected operating costs

Source: Kenanga Research - 4 Feb 2020