1HFY20 CNP of RM291.8m came in below expectations at 47% and 45% of our and consensus’ full-year forecasts, respectively. Declared dividend of 70.0 sen is also deemed below. Moving ahead, we expect the group to experience sequential quarterly improvements, mainly underpinned by post-lockdown demand recovery from its HORECA and out of-home channels. Maintain UP with higher TP of RM129.30 on rolled forward FY21E PER of 46.0x.

Missed expectations. 1HFY20 Core Net Profit (CNP) of RM291.8m came in below expectations at 47% of our and 45% of street’s full-year forecasts, respectively. Note that 1H historically takes up c.60% of full year earnings due to festive-led buying in 1Q. The negative deviation is due to lower-than-expected HORECA sales and higher-than-expected opex during MCO. The declared dividend of 70.0 sen is deemed below.

Results’ highlights. YoY, 1HFY20 revenue of RM2.65b came in lower by 5%, as weaker HORECA and out-of-home channels overshadowed the stronger in-home consumption during MCO. Consequently, CNP slipped 22%, further aggravated by thinner EBIT margin (-3.9 ppt) as the group incurred higher Covid-19 related expenses.

QoQ, 2QFY20 revenue and CNP dropped 15% and 43%, respectively. The weaker set of results were similarly dampened by lower HORECA channels and higher Covid-19 related expenses due to the longer MCO period in 2Q, versus only 2 weeks in 1Q.

The worst should be over. We believe the group should see QoQ improvements ahead, mainly underpinned by the anticipation of demand recovery from its HORECA and out-of-home channels post lockdown. Moreover, earnings should also continue to be cushioned by the group’s established brand presence as one of the market leaders, coupled with its exciting pipeline of new products. Notably, we are also long-term positive on the group’s RM280m capex allocated for the expansion of its Maggi noodles’ production capacity, as well as its foray into plant-based meal solutions by building a pioneering facility in its Shah Alam plant, as these would strengthen the group’s product portfolio.

Post results, we revised our FY20E earnings downwards by 14.3% but kept FY21E earnings unchanged, as we pencilled in weaker sales from HORECA channels and higher Covid-19 related opex. FY20E DPS is also adjusted accordingly to 225.0 sen (from 260.0 sen previously), based on c.99% pay-out ratio.

Reiterate UNDERPERFORM with higher TP of RM129.30 (from RM122.30) as we roll forward our valuation base year to FY21E. We made no changes to our FY21E PER of 46.0x, being 0.5SD above the stock’s 3-year mean. The persistently steep valuation is largely attributed to the defensive quality of its business model and positioning as one of the very few large cap F&B stocks, as well as being a FBMKLCI index member, warranting above-mean valuations. Nonetheless, we believe the aforementioned merits have been largely priced in, and with an uninspiring dividend yield of c.2.0%, we are keeping our UNDERPERFORM call for now. Risks to our call include: (i) stronger-than-expected sales, and (ii) lower-than-expected operating costs

Source: Kenanga Research - 26 Aug 2020