1QFY20 CNP of RM186.3m missed expectations at 27% of ours and 26% of consensus’ full-year forecasts. We are expecting softer quarters ahead as profitability looks to be dampened by weaker out-of-home consumption and higher opex amidst the pandemic outbreak. Following that, we revised our FY20E and FY21E earnings downwards by 10.3% and 8.6%, respectively, to reflect the weaker domestic sales. Maintain UP with lower TP of RM122.30.

Missed expectations. 1QFY20 Core Net Profit (CNP) of RM186.3m came in below expectations at 27% of ours and 26% of consensus’ fullyear forecasts. Note that 1Q historically takes up c.36% of full-year earnings, being a seasonally stronger quarter. We believe the shortfall is largely due to weaker-than-expected sales from earlier CNY timings and softer demand from its Out-of-Home Business channels (i.e. restaurants, coffee shops etc). No dividend was announced, as expected.

Bracing for hurt from the pandemic. YoY, 1QFY20 revenue of RM1.43b came in weaker by 1.3% as softer domestic sales (-3%) overshadowed the robust growth in export sales (+9%). The weaker domestic demand was largely dragged by an earlier CNY sell-in this year and lower demand from the HoReCa channels in tandem with the enforced Movement Control Order (MCO) as consumers were prevented from dining out. Consequently, CNP slipped 20.8%, no thanks to higher raw material costs as well as heightened operating expenses as the group deployed additional resources to ensure safe working condition amidst the pandemic outbreak, which saw EBIT margin contracting by 4.5ppt to 17.7%. In addition, the group’s significant fund allocation for the pandemic relief actions is expected to extend beyond the first half of this year, as a part of their societal commitment.

QoQ, revenue and CNP rose 8% and 43%, respectively. These were mainly boosted by higher CNY sales recorded this quarter, coupled with lower marketing spends and operational expenses recognised in 1QFY20.

The tough gets going. The group is likely to face softer quarters ahead, as profitability looks to be impaired by lower demand for its Outof-Home business channels and higher operating expenses amidst the current pandemic outbreak. Despite that, we believe the aforesaid demerits would be slightly mitigated by the group’s established brand presence as one of the market leaders, as well as the rise in demand for in-home consumption goods. Furthermore, we gathered that the group is allocating RM280m to expand its manufacturing capabilities for Maggi noodles as well as some other high-growth categories that would yield longer-term benefits.

Downwards earnings revision. Post-results, we revised our FY20E and FY21E earnings downwards by 10.3% and 8.6%, respectively, as we take into account weaker domestic sales amid the COVID-19 outbreak.

Reiterate UNDERPERFORM with lower TP of RM122.30 (from RM124.50) following earnings revisions. We relooked our valuations and applied a 46.0x FY20E PER (from 42.0x), 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. 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, and (ii) lower-than-expected operating costs.

Source: Kenanga Research - 6 May 2020