FY19 earnings of RM31.2m (+29%) came within in expectations while the declared dividend of 4.50 sen is deemed to be above our full-year estimates of 4.00 sen. Moving forward, the group’s earnings will largely be anchored by its resilient sales base and favourable PET resin prices. However, the recent coronavirus outbreak may act as a dampener especially for its China trading segment. Post-earnings revision, we keep our OUTPERFORM call with a revised lower TP of RM2.45. Within our expectation. FY19 net profit of RM31.2m came in within our and consensus respective expectations at 101% and 99%. The declared dividend of 4.50 sen is deemed to be above our estimate of 4.00 sen, translating to a pay-out ratio of 30%.

A stronger year. YoY, FY19 net profit rose by 29%, spurred by: (i) robust revenue growth (+8%) on higher sales volume as well as better ASP, coupled with (ii) higher EBITDA margin (+1.4ppt), thanks to lower manufacturing costs from softer PET resin costs. Notably, trading segment in China also posted narrowing losses to –RM2.7m (from – RM3.7m in FY18), on the back of better sales volume and enhanced cost savings. For the individual quarter of 4QFY19, revenue and net profit rose by 2% and 92%, respectively, similarly due to the foresaid reasons.

QoQ, 4QFY19 revenue of RM87.0m saw an 11% dip, dragged by lower production and sales volume. On top of that, a narrower EBITDA margin (-2.8ppt) which was weakened by higher marketing spends consequently led to a 29% decrease in net profit to RM6.5m.

Sailing though uncertain times. Moving forward, we opine that the group’s resilient sales performance should be sustainable, on the back of their products’ inelastic demand in comparison to other generic bottled water offerings. Persistent weakness noted in PET resin prices (takes up c.35% of COGS) should also bode well for better manufacturing margins in the near-term. In spite of all that, the recent coronavirus outbreak has nonetheless clouded prospect for the group’s trading segment in China, though its FY19 full year losses of –RM2.7m is deemed to be small when compared to the group’s overall earnings of RM31.2m.

Post results, we revised our FY20E earnings downwards by 2.1% to account for more conservative sales growth while introducing new FY21E numbers.

Maintain OUTPERFORM with a lower TP of RM2.45 (from RM2.50) following earnings revision. Our TP is premised on an unchanged 16.0x FY20E PER (in line with its 3-year average). While prospects may be slightly clouded by the virus outbreak, we still like the group for its: (i) resilient sales growth, coupled with (ii) improved outlook following favourable PET resin prices.

Risks to our call include: (i) poorer-than-expected sales, and (ii) higher-than-expected costs exposure

Source: Kenanga Research - 27 Feb 2020