9MFY20 CNP of RM39.0m (+67% YoY) and a declared dividend of 3.5 sen (YTD: 8.5 sen) came in within expectations. Despite possible weakness in coming quarter, we continue to like the group for its attractive earnings trajectory which is backed by sturdy fundamentals and more favourable cost environment. A decent yield of c.4% could also offer defence amidst current market uncertainty. Reiterate OUTPERFORM with TP of RM2.75.

Within expectations. 9MFY20 core net profit of RM39.0m (arrived at after stripping off reversal of impairment loss on trade receivables and ESOS expenses) came in within expectations at 76% and 80% of our and consensus’ respective full-year estimates. A declared dividend of 3.5 sen (YTD: 8.5 sen) is deemed to be within our estimate of 9.0 sen.

Results’ Review. YoY, The group posted a solid 67% growth in its 9MFY20 CNP. This is riding on the back of higher EBIT margin (+4.7 ppt), likely boosted by (i) greater operational cost savings, coupled with (ii) better comparative production costs due to more favourable locked-in coffee bean prices. Notably, revenue also rose 14% to RM295.7m, backed by robust sales from both local (+9%) and export (+20%) markets. For the individual quarter of 3QFY20, revenue and CNP grew by 24% and 65%, respectively, similarly due to the foresaid reasons.

QoQ, 3QFY20 CNP slipped 17% to RM11.8m after accounting for the aforementioned one-off items. This is largely owed to a higher effective tax rate of 18.9% (+2.4ppt). Revenue, on the other hand, was rather flattish (+1%) as lacklustre domestic performance was mitigated by growth in exports (+2%).

Possible QoQ weakness. Moving into 4QFY20, the group may experience some weakness in its top-line, due to the coronavirus outbreak and the sugar tax hike in the Middle East (effective 1st Dec 2019). Nonetheless, this should be cushioned by greater operational efficiency as well as more favourable cost environment, on the back of: (i) prudent A&P spending focusing on ROI, (ii) favourable locked-in raw material prices, and (iii) potentially lower taxes from overseas tax shelter. Notably, management is also actively addressing the sugar tax hike in Middle East, possibly through the form of more affordably priced alternatives to mainstream products. That said, we are reaffirmed that the group is en route towards a stronger FY.

Post-results, we made no changes to our earnings forecasts.

Maintain OUTPERFORM with a TP of RM2.75. Our TP is premised on an unchanged 20.0x FY21E PER, which is closely in-line with its 3-year mean. All-in, we continue to like the name for its attractive growth trajectory, stemming from its sturdy fundamentals and fresh strategies. A decent yield of c.4% could also offer some degree of defence against market uncertainty.

Risks to our call include: (i) lower-than-expected sales, (ii) higherthan-expected commodity and marketing costs, and (iii) lower-thanexpected dividends.

Source: Kenanga Research - 28 Feb 2020