1QFY20 earnings of RM8.8m (+14% YoY) and the absence of dividend are deemed to be within expectations. We are anticipating a weaker quarter ahead, as bottled water consumption is likely to be greatly dampened by lower retail footfalls amidst the enforced movement restrictions. Nonetheless, more favourable PET resin costs should help to partially mitigate the anticipated weaker sales. Downgrade to MARKET PERFORM with a lower TP of RM2.10 (from RM2.30) following earnings downgrade. Broadly within expectation. 1QFY20 net profit of RM8.8m is deemed to be broadly within expectation at 29% of our full-year forecast, as we expect a weaker 2QFY20 amidst the Covid-19 outbreak. No dividend was announced, as expected.

More favourable cost environment. YoY, 1QFY20 net profit rose 14% on the back of lower manufacturing costs from softer PET resin costs, which translated to higher EBITDA margin of 18.8% (+4.6ppt). Despite that, revenue actually came in lower by 2%, dragged by weaker sales of plastic packaging material. Meanwhile, trading segment in China also posted slightly wider losses of RM0.6m, versus 1QFY19 losses of RM0.5m.

QoQ, 1QFY20 revenue and net profit both saw a jump, 7% and 35%, respectively, largely boosted by greater bottled water demand and more favourable raw material cost (i.e. PET resin).

Covid-19 impact to be felt in 2Q. Against the backdrop of the on going Covid-19 outbreak, the group will likely suffer from a weaker subsequent quarter. This is because bottled water consumption, which we believe, is inversely correlated with the surge in in-home consumption, could be badly hit by the movement restrictions and significant fall in retail footfalls. That being said, the persistent weakness noted in the PET resin prices (takes up c.35% of COGS) should help to partially mitigate the foresaid demerits, by keeping the manufacturing margins fairly steady in the near-term. Meanwhile, the group’s trading segment in China could record narrower losses this FY, as the Covid-19 impact is mostly limited to 1QFY20.

Post results, we revised our FY20E and FY21E earnings downwards by 7.8% and 10.7%, respectively, by pencilling in weaker sales amidst the pandemic outbreak. We are maintaining our dividend pay-out assumption of c.30% for now, as the group’s balance sheet remains healthy with a net cash pile of c.RM17.4m.

Downgrade to MARKET PERFORM with a lower TP of RM2.10 (from RM2.30) following the earnings downgrade. Our TP is premised on an unchanged 16.0x FY20E PER (closely in-line with its 3-year average). In view of the clouded near-term prospect amidst the virus outbreak, we believe the group’s positives – its long-term resiliency and healthy balance sheet may have been fully priced in at this juncture, limiting its near-term upside potential.

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

Source: Kenanga Research - 25 Jun 2020