1QFY20 core net profit of RM64.0m (+21.3%) came in within expectations. Nonetheless, we are expecting weaker quarters ahead as a huge chunk of the group’s revenue is anticipated to be severely impacted by the on-going pandemic outbreak. Thus, we are downgrading the stock to UNDERPERFORM with a lower TP of RM20.85 (from RM26.05), following a downward earnings revision.

Within expectations. 1QFY20 core net profit of RM64.0m (after stripping off one-off provision for inventory write-off) came in within expectations at 18% and 20% of our and consensus’ forecasts, respectively. The results are deemed in-line as the group typically experience lumpy 4Q sales and earnings, owing to heavy Chinese New Year (CNY) front-loading. No dividend was announced, as expected.

Covid-19 impact starting to show. YoY, 1QFY20 revenue fell 1.8% to RM515.9m, largely dragged by weaker sales in March 2020 which saw a 50% drop as the group had to temporarily suspend its brewery operations to comply with the Movement Control Order (MCO) effective 18 March 2020. Nevertheless, 1QFY20 earnings managed to rise 21.3%, on the back of successfully executed CNY campaigns in January and February, as well as better controlled commercial spending.

QoQ, 1QFY20 revenue and earnings dropped 24.1% and 29.8%, respectively, no thanks to: (i) stronger sales in the previous quarter which was driven by early CNY sell-in, coupled with (ii) weaker sales recorded in March this year following the enforced MCO and temporary brewery closure.

Cloudy near-term prospect. The group is likely to experience weaker quarters ahead, as we estimate approximately two-third of the group revenue (i.e. from on-trade channels) will be severely impacted by the brewery and on-trade markets closures amidst the pandemic outbreak. Recap that the group’s brewery was closed from 18 March 2020 to 3 May 2020 in compliance with the enforced MCO, while majority of the on-trade businesses still remain closed or are only open for take-away throughout MCO and Conditional Movement Control Order (CMCO) periods. Nonetheless, the group’s initiatives to accommodate the shift in consumer spending patterns by accelerating its presence in the ecommerce channels may help to slightly cushion the foresaid negatives. All-in, with the bulk of the group’s sales being derived from on-trade channels, we are of the view that the group’s near-term outlook remains clouded, depending on the eventual duration of the pandemic outbreak.

Post-results, we slashed our FY20E and FY21E earnings forecast by 29.7% and 24.1%, respectively, as we take into account the lower sales from its on-trade channels.

Downgrade to UNDERPERFORM with lower TP of RM20.85 (from RM26.05) following an earnings revision. We also took the chance to roll forward our valuation base year to FY21E with an unchanged 22.0x PER (closely in-line with its 3-year mean). While we still like the name for its market leader position coupled with an improving operating environment with effective clamp-down of illicit beers, we are nonetheless cautious over its near-term outlook being dampened by the Covid-19 outbreak. Risks to our call include: (i) stronger-thanexpected sales volume, and (ii) lower-than-expected operating expenses.

Source: Kenanga Research - 20 May 2020