Post-meeting, we remain cautiously positive on the group’s prospects amid the Covid-19 outbreak, which is mainly anchored by sustained growth from MPM segment. While the elevated valuation appears to be justified by the better shares liquidity from the proposed bonus issue and rosy earnings growth expectations of c.13-10%, the recent share price rally may have priced in the merits. Hence, it is downgraded to UP with an unchanged TP of RM9.05.

1QFY21 Results` Preview. Earmarked to be released on 26 Aug, we are expecting the group’s upcoming 1QFY21 earnings to come in at c.RM56-57m (+33% QoQ, +13% YoY) versus our full-year forecast of RM271.8m and consensus’ RM272.5m. Note that 1Q is a seasonally weaker quarter, historically taking up c.21% of full-year’s earnings. The quarter is expected to be buoyed by better demand from its Marine Products Manufacturing Segment (MPM), and stronger Palm Oil Activities Segment from favourable locked-in CPO prices. No dividend is expected (versus our full-year expectation of 5.5 sen pay-out), as the group typically pays out a single interim dividend in the fourth quarter.

Fishery segment unfazed by Covid-19. In FY20, the group’s MPM segment saw PBT soaring 25% YoY, thanks to persistently robust demand for fishmeal and surimi-based products. With this anchor segment (which takes up c.57% of group’s PBT) proven to be shielded from the wrath of Covid-19, the solid growth is anticipated to extend into FY21 despite uncertainties surrounding a potential “second wave”, mainly premised on (i) stronger demand from both local (including Family Mart) and export markets, coupled with (ii) stable fish-cycle yielding better catch rates.

Poultry segment backed by regional expansion. We gathered that local poultry demand has normalised to pre-MCO levels following the slowing egg consumption (less baking activities) as more people returned to work. On top of that, weakness could continue to come from the persistently volatile poultry prices in Peninsular Malaysia. Therefore, in order to counter such uncertainty, the group remains committed to tap on the growing egg consumption in Vietnam and Indonesia on top of the steadier market pricing, which should provide a greater certainty to this segment’s contribution in the longer-term.

Family Mart picking up post-MCO. Gearing towards FY22 target of 300 stores (200 stores opened to-date), the group is targeting for 60 new stores opening in FY21 mainly in the sub-urban areas, which showed better foot traffic than urban areas. Weaker sales (c.40% drop) led by lower foot traffic during MCO have since picked up post-MCO, with July performances almost back to pre-MCO levels. The group is also looking to establish its own e-commerce platform through its Family Mart App by engaging a 3rd party vendor, while its partnership with Foodpanda saw good response but at lower margins. We reiterate our view that this segment will be an exciting avenue of growth, premised on its higher margin fresh food content which takes up c.75% of its sales.

Downgrade to UNDERPERFORM with unchanged TP of RM9.05 as we maintain our earnings forecasts. Our valuation is based on a 54.0x FY21E PER (closely in-line with the stock’s +1.0SD over its 3-year mean). While valuation appears rich at this level, we believe it is justified, premised on its resiliency, added liquidity from the bonus issue and rosy earnings growth expectations of c.13-10%. Nonetheless, the recent share price rally may have priced in the foresaid merits, limiting its near-term upside potential. Risk to our call includes better-than-expected MPM sales.

Source: Kenanga Research - 30 Jul 2020