9MFY20 net profit of RM53.2m (-30% YoY) came in below expectations at 60%/53% of our/street’s full-year forecast, attributable to poorer-than-expected margins. Moving forward, top-line should be sustained by the group’s aggressive promotional pricing strategies, though it is likely to come at the expense of lower profitability, in our view. Maintain MP with lower TP of RM35.05, following an earnings downgrade.

Negative surprise. 9MFY20 net profit of RM53.2m missed expectations at 60% and 53% of our and consensus’ respective full- year forecasts. The negative deviation is likely due to poorer-than- expected margin from higher raw material cost and poorer product mix. The declared dividend of 40.0 sen, which brought YTD dividend to 80.0 sen is in-line with our forecast.

Results’ highlights. YoY, 9MFY20 revenue grew 3%, likely sustained by the higher in-home consumption which overshadowed the lower HoReCa sales during Covid-19. Nonetheless, net profit slipped 30% to RM53.2m, on the back of thinner EBIT margin (-4.6ppt). The poorer profitability was dragged by: (i) costlier dairy raw materials, coupled with (ii) poorer product mix in tandem with the group’s competitive pricing strategies.

QoQ, 3QFY20’s higher revenue (+5%) was backed by sequentially stronger HoReCa sales post-lockdown and more effective distribution strategy. Despite that, net profit still came in lower by 57%, similarly due to the aforementioned reasons, as well as higher commercial spends to support the “Stronger me, Stronger us” campaign.

Outlook. Moving forward, the group should be able to preserve its sales-base on the back of fresh product innovations and strategic pricing strategies, though more aggressive promotional prices could persist to dampen profitability. Notably, we are observing weakness in global dairy prices – as of 17 Nov 2020, Skimmed Milk Powder (SMP) traded at USD2,799/MT (-7% YoY) while Anhydrous Milk Fats (AMF) traded at USD4,175/MT (-18% YoY) (Source: Global Dairy Trade). Nonetheless, these downticks in dairy prices may only pose muted effects, mitigated by 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 of c.RM57m to expand its manufacturing capability (current utilisation rate: 75%). The price of RM40/psf seems fair while 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 three years after the completion of the acquisition.

Post-results, we cut our FY20E/FY21E earnings by 22.8%/6.6%, respectively, by pencilling in more prudent margin assumptions.

Maintain MARKET PERFORM with lower TP of RM35.05 (from RM37.55), based on FY21E PER of 24.0x (closely in-line with -1.5SD over its 3-year mean). The ascribed valuation is premised on the group’s lacklustre outlook, which is diminished by the lack of profitability growth visibility. Risks to our call include: (i) better/weaker-than- expected sales, (ii) better/weaker-than-expected cost environment

Source: Kenanga Research - 27 Nov 2020