Post-meeting, we feel cautiously positive on the group’s prospects, anchored by sustained growth in its MPM and ILF segments. Anticipated to be segmented out in 4QFY20, the group’s FamilyMart expansion has exceeded its targeted 170 outlets in FY20. Raised our call to MARKET PERFORM with a higher TP of RM8.30 (from RM6.60), our higher valuations premised on the group’s resilient earnings base and rosy earnings growth expectations of c.13-10%.

Sailing safely through a storm. To recap, the group’s Marine Products Manufacturing segment (MPM) saw PBT jumping 43% YoY in 1HFY20, thanks to better demand from its fishmeal and surimi-based products. The strong growth is expected to persist moving into the remainder of FY20, on the back of: (i) stable fish cycle yielding better catch rates, (ii) sustained sales momentum from the frozen prawn and frozen surimi-based products, with (iii) continuous ramp up in production at the group’s Hutan Melintang plant with current utilisation rate at c.60%. Notably, we believe that the group’s sales have been largely unaffected by the recent coronavirus outbreak as the epidemic has instead spurred panic buying on food products.

Integrated Livestock Farming (ILF) backed by regional expansion. As the local poultry scene is expected to be challenging on volatile egg prices, management has planned to tap on the growing egg consumption in Vietnam and Indonesia on top of the more stable market pricing. By FY22, the group looks to ramp up egg productions in Vietnam from 0.85m to 1.8m eggs/ day and Indonesia from 0.85m to 1.4m eggs/day gradually which should buoy the segment’s earnings.

Bring your family to FamilyMart. On track with meeting the FY22 target of 300 locations, the segment has already exceeded the targeted 170 outlets by FY20, with c.176 stores to date. With increasing presence in Klang Valley, Johor, Melaka, Pahang and Negeri Sembilan, the group will continue branching out with potential openings in Ipoh and Penang. We gathered that decent food traffic in these areas tend to fare higher average revenue per store from the added convenience. In the longer-term, we believe that this segment will be an exciting avenue of growth for the group, banking on its high fresh food content which we believe takes up c.80% of its sales.

Better CPO prices to be reflected only from 4QFY20. Following the rise in CPO prices, palm oil activities are likely to see better earnings prospects in 4QFY20 and 1QFY21 as the group managed to sell forward contracts at CPO price of RM3,000/mt up until June. Note that the segment may still remain lacklustre in the upcoming 3QFY20 on poor CPO prices. Maturing palm profile from Indonesia coupled with an anticipated fresh fruit bunch (FFB) production growth of 20% for FY20 are expected to support the segment moving forward.

Post meeting, we raise our FY21E earnings by 5.2%, mainly on better growth assumptions for MPM, which should continue to be the group’s primary earnings contributor (c.69% of 1HFY20 PBT).

Upgrade to MARKET PERFORM with a higher TP of RM8.30 (from RM6.60). Our valuation is based on higher earnings estimates in addition with a higher 50.0x FY21E PER (from 42.0x, within the stock’s +1.5SD over its 3-year mean PER). While valuation appear rich at this level, we believe it is fair, premised on its resilient earnings base and rosy earnings growth expectations of c.13-10%, overwhelming pedestrian dividend yield of c.1%. Comparatively, other large cap F&Bs are expected to only demonstrate c.8% earnings growth on average.

Source: Kenanga Research - 12 Feb 2020