At 80% of our full-year estimate, 9MFY20 earnings of RM324.4m (-5.2% YoY) is deemed within expectation with the coming 4Q a seasonally weaker quarter, and the absence of dividend is also in line. Post-lockdown, earnings recovery could be well underway, to be further supported by the group’s continuous product innovations. Maintain OP with unchanged TP of RM36.20, as we continue to favour the group for its resiliency and sturdy fundamentals.

Broadly within. 9MFY20 Net Profit of RM324.4m came in broadly within expectations, forming 80% of our and 79% of consensus’ estimates, given that 4Q is a seasonally weaker quarter due to the lack of festivities. The absence of dividend announced (YTD: 27.0 sen) is also deemed to be within expectation.

Revealing Covid-19 impact. YoY, 9MFY20 net profit slipped 5%, largely dampened by weaker Malaysia operations, which saw operating profit plunging 23% on the back of weaker sales (especially from HORECA, convenience stores and general trade channels which were severely impacted by the Covid-19 movement restrictions), higher dairy input costs as well as higher A&P expenses. However, this was partially cushioned by better performance from its Thailand operations, which saw operating profit rising 2%, thanks to favourable forex. For the individual quarter of 3QFY20, net profit was weaker by 18%, as both Malaysia and Thailand operations were dragged by weaker consumer sentiment amid the pandemic outbreak.

QoQ, 3QFY20 revenue and CNP dropped by 9% and 8%, respectively, largely dragged by weaker Thailand operations (13% drop in operating profit) as majority of the front-loading activity ahead of the Thailand emergency decree took place in 2QFY20.

Easing into the new norm. We believe that earnings should gradually recover moving forward, following the relaxation of movement restrictions in both Malaysia and Thailand. Moreover, the anticipated earnings recovery should be further supported by the group’s continuous product innovations, with recent new launches including “teh tarik” beverages – namely F&N Teh Tarik Ori and F&N Teh Tarik Less Sweet variants in Malaysia, coupled with MAGNOLIA Milkies (milk tablets made from 100% New Zealand milk) & limited-edition Mango-flavoured Sweetened Condensed Milk in Thailand. On the other hand, while the group had a setback on the failed acquisition of MSM’s Ladang Chuping land, we are nonetheless positive on the group’s intention to continue pursuing a dairy farm plan. The current weak economic environment may work well to its advantage as there may be other more attractively-priced land offers. Recap that in the longer-term, the said plan would aid the group in expediting growth within the fresh milk segment on the back of more competitive cost advantages.

Post-results, we made no changes to our earnings forecast.

Maintain OUTPERFORM on unchanged TP of RM36.20 based on an unchanged ascribed FY21E PER of 30.0x (closely in-line with +0.5SD over the stock’s 3-year mean). We deem our valuations to be fair, premised on: (i) its sturdy fundamentals and resiliency which could provide some degree of comfort under the current market uncertainty, coupled with (ii) premium valuations attached to large-cap F&B stocks in lieu of their earnings defensiveness. Yet, dividend could be a slight dampener with the anticipated low yield of c.2%. Risks to our call include: (i) slower-than-expected growth in Thailand F&B business, and (ii) higher-than-expected operating costs.

Source: Kenanga Research - 5 Aug 2020