FY19 CNP of RM652.0m (+0.4%) came in within our expectation at 97% but slight below consensus at 94%. While profitability may be dampened by volatile macroeconomic factors moving forward, the group’s resilient sales base is likely to be supported by its strong brand presence as well as new product launches. As valuations remain rich at this juncture, UNDERPERFORM kept but with lower TP to RM124.50 (from RM128.00) on earnings revision.

Within our expectation. FY19 Core Net Profit (CNP) of RM652.0m (arrived at after stripping off one-off chilled dairy business disposal gain of RM21.0m) came in within our expectation at 97% but slightly below consensus’ forecast at 94%. We believe the deviation is largely owed to weaker-than-expected export sales growth. A declared final dividend of 140.0 sen which brought full-year dividend to 280.0 sen is deemed to be slightly below our forecast of 290.0 sen, implying a pay-out ratio of 97.6%.

An uninspiring year. YoY, FY19 reported revenue of RM5.52b came in flattish with an observed growth of 2% after adjusting for the divested chilled dairy business. This is attributed to sustained domestic sales growth of 5%, likely backed by the group’s strong sales execution as well as successful product innovations. In spite of this, CNP was flattish at RM652.0m (+0.4%) as higher raw material costs were offset by greater cost efficiencies. For the individual quarter of 4QFY19, reported revenue came in lower (-1.4%) while the adjusted revenue net of Chilled Dairy divestment came in flattish, as sustained domestic sales were shadowed by weaker export demand. Nonetheless, CNP of RM130.6m grew 14%, mainly driven by of lower ETR of 23% versus 4QFY18’s 31%.

QoQ, revenue of RM1.33b (-5%) was largely dampened by phasing of marketing activities. Consequently, CNP also closed lower (-12%) following a thinner core EBIT margin (-0.6ppt), dragged by higher commercial spends for an early CNY in 2020.

Sailing through times of uncertainty. Recent global developments have caused a great sense of uncertainty on macroeconomic factors, leading to volatile commodity prices and exchange rates. While this may dampen the group’s profitability moving forward, we believe the group’s resilient domestic sales will continue to be anchored by its established brand presence as one of the market-leaders, as well as new product launches. In the longer-run, its newly completed Milo plant in Chembong is also anticipated to aid in providing better economies of scale and greater production capabilities.

Post-results, we revised our FY20E CNP downwards by 2.8% to account for more conservative export sales growth while introducing new FY21E estimates.

Maintain UNDERPERFORM with a lower TP of RM124.50 (from RM128.00) following an earnings revision. Our call is premised on an unchanged 42.0x FY20E PER, being 0.5SD above the stock’s 3-year mean. The persistently steep valuation is largely attributed to the defensive quality of its business model and positioning as one of the very few large cap F&B stocks, as well as being a FBMKLCI index member, warranting above-mean valuations for now. Nonetheless, we believe the aforementioned merits have been largely priced in, and with an uninspiring dividend yield of c.2.0%, we are keeping our UNDERPERFORM call for now. Risks to our call include: (i) stronger-than-expected sales, (ii) more favourable commodity prices, and (iii) lower-than-expected operating costs.

Source: Kenanga Research - 26 Feb 2020