9MFY20 CNP of RM420.2m came in within our expectation at 79% but below consensus at 67%. The declared dividend of 70.0 sen (YTD: 140.0 sen) is also deemed within. Moving ahead, we expect the group’s earnings to be largely cushioned by solid in-home consumption, as HORECA channels are likely to remain challenged given the resurgence of Covid-19 cases lately. Maintain UP with unchanged TP of RM129.30.

Within our expectation. 9MFY20 Core Net Profit (CNP) of RM420.2m is deemed to be within our expectation at 79% but below consensus at 67%. Note that 9M historically takes up c.80% of full-year earnings due to festive-led buying in 1Q. The mismatch with street’s estimates could be due to more aggressive growth assumptions for the recovery in HORECA channels. The declared dividend of 70.0 sen (YTD: 140.0 sen) is also as expected.

Results’ highlights. YoY, 9MFY20 revenue of RM4.04b came in slightly weaker by 3.5%, predominantly dragged by the disrupted HORECA channels amid the Covid-19 led movement restrictions, especially in the first half of the year. That said, the foresaid demerits were cushioned by the group’s core F&B business which registered a 1% growth in sales in spite of the pandemic, attributed to solid in-home consumption, coupled with effective marketing campaigns (i.e. Nestle Salary for Life Contest, Milo 70 Years of Goodness in 70 days, etc). Consequently, CNP dropped 19%, further aggravated by thinner EBIT margin (-3ppt) due to higher Covid-19 related expenses.

QoQ, 3QFY20 revenue and CNP rose 14% and 22%, respectively. The stronger set of results was mainly boosted by stronger contribution from both in-home and HORECA channels following the easing of movement restrictions, as well as sequentially lower Covid-19 expenses in 3Q.

Resilient in-home consumption to hold the fort. Moving forward, the group’s HORECA channels are likely to remain under pressure, given the resurgence of Covid-19 cases locally coupled with the gradual imposition of CMCO in most states of peninsular Malaysia. That said, we are not overly concerned as earnings should continue to be buoyed by: (i) resilient in-home consumption, (ii) the group’s established brand presence as one of the market leaders, coupled with (iii) its exciting pipeline of new products. Notably, we are also long-term positive on its RM280m capex allocated for the expansion of its Maggi noodles’ production capacity, as well as 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 further down the road.

Post results, we made no changes to our earnings estimates.

Reiterate UNDERPERFORM with unchanged TP of RM129.30. We made no changes to our FY21E PER of 46.0x, at 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 - 11 Nov 2020