FY19 CNP of RM105.4m (-15% YoY) came in within our expectation at 103% while a full-year dividend pay-out of 100.0 sen missed estimate. Post-results, we maintain MARKET PERFORM but with a lower TP of RM43.85 following earnings and valuation downgrade. This is due to the current global uncertainties clouding its prospect which may dampen profitability and investors’ sentiment for the stock.

Within our expectation. FY19 Core Net Profit (CNP) of RM105.4 came in within expectation at 103% of our forecast. Surprisingly, no dividend was declared. This brought full-year dividend pay-out to 100.0 sen, which is lower than our full-year forecast of 160.0 sen.

Weaker bottom-line. YoY, FY19 core earnings dropped 15%, dragged by lower EBIT margin (-3.4ppt) of 13.2%. The profitability was weakened by: (i) lower ASP from re-pricing strategies, (ii) costlier raw material and, (iii) unfavourable forex. This was in spite of stronger revenue (+2%) of RM1.07b which was driven by pricing strategies which led to increased sales volumes. For the quarter of 4QFY19, revenue grew by 4% while core net profit fell by 6%, similarly due to the foresaid reasons.

QoQ, core earnings of RM28.3m grew 16%, boosted by lower ETR of 22.3% (-5.4 ppt) which more than offset the higher marketing spends. Revenue also grew by 2%, in-line with volume growth (kilograms) of 2%.

Clouded by global uncertainties. Moving ahead, the group should be able to preserve its sales-base on the back of fresh product innovations and strategic pricing strategies, though more aggressive promotional prices could dampen profitability at this juncture. Notably, we are observing weakness in global dairy prices – as of 18 Feb 2020, Skimmed Milk Powder (SMP) traded at USD2,840/mt (-6% YTD) while Anhydrous Milk Fats (AMF) traded at USD4,379/mt (-11% YTD)

(Source: Global Dairy Trade). Nonetheless, these downticks in dairy prices may only pose muted effects, mitigated by an upward fluctuation in USD rates and the group’s global procurement network with a 6- month inventory planning.

Post-results, we lowered our FY20E CNP by 4.2% to account for more conservative cost assumptions while introducing a new set of FY21E estimates.

Maintain MARKET PERFORM with a lower TP of RM43.85 (from RM49.30), based on a lower applied FY20E PER of 26.0x from previously 28.0x (closely in-line with -2SD over its 3-year mean). The lower ascribed PER is premised on the group’s clouded outlook against the backdrop of current global uncertainties, which may spell greater volatility to raw material costs and thus profitability. On top of that, the low liquidity of the stock could also dull investors’ appetite for the stock.

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

Source: Kenanga Research - 26 Feb 2020