The weak 1QFY20 CNP (-17%YoY) and the absence of dividend missed expectations. In view of anticipated weaker quarters and lower dividend pay-out moving forward amidst the current pandemic outbreak, its recent stock price rally could be overdone. Hence, we are advocating a “sell-onstrength” strategy to capitalize on the rally. Downgrade to UP with lower TP of RM21.00 (from RM25.65) following earnings and valuation revisions.

Missed expectations. 1QFY20 core net profit (CNP) of RM73.0m came in below expectations at 23% and 26% of our and consensus’ forecasts, respectively. We believe the shortfall is mainly due to lowerthan-expected sales growth amidst the pandemic outbreak. Note that 1Q is a seasonally stronger quarter, which historically takes up c.29% of full-year’s earnings. No dividend was announced, which was a negative surprise.

No dividend for the FY. Given the rising uncertainties amidst the coronavirus outbreak, the group has decided to suspend the quarterly dividend payments for the financial year ending 31 Dec 2020 to preserve cash and liquidity. Note that the group is standing on a net cash pile of c.RM29.2m as of 31 March 2020.

Weaker set of results. YoY, 1QFY20 revenue and CNP fell 11% and 17%, respectively, mainly dragged by the absence of CNY front-loading this quarter as well as lower contribution from its on-trade channels (i.e. sales from bars and restaurants) amidst the virus outbreak. Both its Malaysia and Singapore business recorded respective drop of 20% and 14% in operating profits. This is stemming from the lower sales volumes from both geographical segments which were diminished by the foresaid reasons. Meanwhile, the group’s associate Lion Brewery registered an associate contribution of RM5.1m, which grew 9% compared to RM4.7m in 1QFY19.

QoQ, 1QFY20 recorded slight growth in revenue of RM589.9m (+3%) and CNP of RM73.0m (+1%), mainly lifted by greater contribution (operating profit: +14%) from its Malaysia operations thanks to the CNY-led sales in January. Overall growth was, however, slightly shadowed by poorer performance from Singapore operations, which saw operating profit falling 42%.

Lackluster near-term prospect. We are bracing for weaker quarters moving forward, as we estimate that around two-third of the group sales (i.e. from on-trade channels) will be severely impacted by the softer demand amid the pandemic outbreak. This is against the backdrop of the enforced Movement Control Order (from 18 March – 3 May) in Malaysia and the Circuit Breaker (from 7 April – 1 June) in Singapore, which resulted in the closure or only takeaways allowed for majority of the on-trade channels. On top of that, postponements of major sporting events are also likely to have exacerbated the slowing demand.

Post-results, we cut our FY20E and FY21E earnings by 21.9% and 18.7%, respectively, to account for aforementioned softer sales. We also revised our dividend pay-out assumption to 50% for FY20 and 88% for FY21.

Downgrade to UNDERPERFORM with a lower TP of RM21.00 (from RM25.65), following earnings revisions. This is premised on a rolled forward valuation base year of FY21E with a lower ascribed PER of 23.0x (from 25.0x), which is closely in-line with its 3-year mean. While we still like the group for its premiumisation long-term prospects, we believe its recent stock price rally could have been overdone in view of its looming near-term weakness and lower dividend pay-out. Hence, we are ascribing a tactical 'UNDERPERFORM' call, advocating a 'sell-onstrength' strategy to realize gains from this recent rally. Risks to our call include is higher-than-expected sales volume

Source: Kenanga Research - 1 Jun 2020