1QFY20 earnings of RM22.7m (-33% YoY) and declared dividend of 40.0 sen came in below expectations. We expect the group to experience softer earnings ahead, premised on: (i) potentially lower sales amidst MCO, and (ii) its long-term promotional pricing strategy which could further impede profitability. Meanwhile, its proposed land acquisition is deemed to be a longer-term prospect. Downgrade to UNDERPERFORM with a lower TP of RM37.55 following an earnings revision.

Missed our expectation. 1QFY20 net profit of RM22.7m missed expectation at 21% of our full-year forecast. We believe the mismatch is largely owed to weaker-than-expected sales volume and higher-than- expected raw material cost. A single interim dividend of 40.0 sen was announced, in-line with weaker earnings.

Poorer results overall. YoY, 1QFY20 revenue came in weaker by 5% at RM251.2m, no thanks to the shift in product mix and early Covid-19 impact. Consequently, net profit plunged by a greater quantum of 33% to RM22.7m, largely dragged by: (i) lower ASP from re-pricing strategies, and (ii) costlier dairy raw material.

QoQ, revenue dropped 11% while net profit slipped by 15%, similarly due to the aforementioned reasons.

Will the strategic pricing strategies bear fruits? We believe the group is likely to experience weakness ahead, as profitability may be dampened by: (i) potentially weaker product demand from lower retail footfall amidst the enforced Covid-19 movement restrictions, as well as (ii) the group’s long-term aggressive promotional pricing strategy – in hopes to drive greater milk penetration in the long-term, which would impede the group’s profitability in the near-term. Meanwhile, the overall cheaper dairy prices noted YoY may only pose muted effects, mitigated by an upward fluctuation in USD rates and the group’s global procurement network with a 6-month inventory planning.

Proposed land acquisition a longer-term prospect. Back in March 2020, the group proposed a land acquisition in Bandar Enstek Industrial Park for c. RM57m to expand its manufacturing capability (current utilisation rate: 75%). The price of RM40/psf seems fair (recent prices transacted on land in Bandar Enstek Indusrial Park ranged between RM35 – RM55 psf) and financing of RM57m is within the group’s net cash balance sheet’s capacity. We view this acquisition as reasonable given that its part of a long-term capex to expand its production capacity in its core business of manufacturing milk products. Nonetheless, we rule out any near-term earnings’ accretive development as the construction works are earmarked to be concluded 3 years after the completion of the acquisition.

Post-results, we lowered our FY20E and FY21E earnings by 18.1% and 9.4%, respectively, to account for weaker sales amidst Covid-19 and lower margin from the group’s promotional pricing strategy.

Downgrade to UNDERPERFORM with a lower TP of RM37.55 (from RM40.50), based on an unchanged rolled forward FY21E PER of 24.0x (closely in-line with -1.5SD over its 3-year mean). The ascribed PER is premised on the group’s clouded outlook against the backdrop of current global uncertainties, which may spell greater volatility to raw material costs and thus profitability. On top of that, the low liquidity of the stock could also dull investors’ appetite for the stock. Risks to our call include: (i) better-than-expected sales, (ii) better-than-expected cost environment

Source: Kenanga Research - 29 Jun 2020