1HFY20 net profit of RM44.0m (-14% YoY) and the absence of dividend are in line. We expect 2HFY20 net profit to remain weaker YoY, due to (i) normalising in-home consumption post the spike during the lockdown period, coupled with (ii) its long-term promotional pricing strategy which could further impede profitability. That said, the recent share price weakness means that valuations now look fair, in our view, and hence, we upgrade the stock to MARKET PERFORM with an unchanged TP of RM37.55.

No surprises. 1HFY20 net profit of RM44.0m came in within expectation at 50% of our full-year forecast. No dividend was announced (YTD: 40.0 sen), as expected.

Results highlights. YoY, 1HFY20 revenue grew 3% to RM524.7m, which we believe was largely driven by higher in-home consumption during the imposed MCO (spanned from 18 March until 12 May) in 2QFY20. Nonetheless, net profit dropped 14% to RM44.0m, no thanks to (i) costlier dairy raw material, coupled with (ii) poorer product mix dragged by weaker out-of-home consumption during the pandemic outbreak, as well as the group’s competitive pricing strategies.

QoQ, revenue rose 9% to RM273.5m, boosted by higher in-home consumption. However, net profit slipped by 7% to RM21.2m on thinner EBIT margin (-2.7 ppt QoQ), similarly due to the aforementioned reasons.

Back to the “new normal”. We think 2HFY20 net profit could stay weaker YoY due to: (i) anticipation for a gradual normalisation from the spike in in-home consumption demand post lockdown, and (ii) the group’s long-term promotional pricing strategy which could further impede profitability. Meanwhile, the overall cheaper dairy prices noted YoY may only offer muted effects, given the weakening of the RM vs USD YTD 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 ranged between RM35 – RM55 psf) and financing 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 made no changes to our earnings forecasts.

Upgrade to MARKET PERFORM following the recent share price weakness, with an unchanged TP of RM37.55, based on FY21E PER of 24.0x (closely in-line with -1.5 SD over its 3-year mean). The ascribed valuation is premised on the group’s lacklustre outlook, which is diminished by the lack of earnings growth visibility. Nonetheless, the recent share price weakness could have priced in the foresaid demerits, limiting its downside potential. Risks to our call include: (i) better/weaker-than-expected sales, (ii) better/weaker-than-expected cost environment

Source: Kenanga Research - 25 Aug 2020