Although 1QFY21 CNP of RM136.8m (+7% YoY) was within expectations, we trim FY21 CNP estimates as 2Q will likely come in weaker than previously anticipated amid the resurgence of Covid-19 cases in both Malaysia and Thailand. Moving forward, the group’s resilient in-home consumption and export business are likely to be partially shadowed by the pandemic-driven uncertainties as well as higher commodity price trends. Maintain MP with lower TP of RM32.55 following an earnings downgrade.

Within expectations but FY21 earnings cut. 1QFY21 CNP of RM136.8m is deemed to be within expectations at 31% of our and consensus’ estimates, with 1Q being a historically stronger quarter, typically makes up 30% of full year earnings. However, as we expect the upcoming quarter to be weaker amid the resurgence of Covid-19 cases globally, we trim full year earnings. No dividend was announced, as expected.

Bottom-line boosted by tax incentives. YoY, 1QFY20 CNP rose 7% on the back of lower ETR of 14% (versus 1Q19’s 20%) which is mainly attributable to tax incentives enjoyed by the Thai subsidiary. On a closer look, Malaysia operation recorded lower revenue (-3%) and operating profit (-8%) as weaker consumer sentiment amid Covid-19 and higher raw material costs overshadowed its sustained export revenue. Meanwhile, Thailand operations also saw poorer revenue (-2%) and operating profit (-1%) due to the weaker Thai Baht. However, it is notable that in Thai Baht terms, Thai operations’ revenue (+0.6%) and operating profit (+1.5%) were driven by stronger Indochina export markets, as well as more controlled A&P spending.

Stronger QoQ, revenue and CNP saw a hike of 14% and 73%, respectively. The growth is premised on (i) gradual recovery in domestic and export markets as businesses eased into the new norm amid the more relaxed covid SOPs, coupled with (ii) lower ETR of 14% against 4Q’s 21% similarly due to the foresaid reason.

Riding the waves of uncertainties. Moving forward, qualms surrounding the resurgence of Covid-19 globally as well as the higher commodity price trends are likely to continue to temper with the anticipated earnings recovery. However, we believe the group would be able to weather through these uncertain times, on the force of (i) resilient in-home consumption demand which is largely unfazed by the pandemic, (ii) robust export sales of RM796m in FY20 (+15% YoY), which was in- line with the group’s pre-pandemic target of RM800m in FY20, (iii) as well as its sturdy balance sheet. Notably, the group’s recent acquisition of the Sri Nona companies (involves in manufacturing and sale of ketupat, condiments and beverages) would aid in complementing the group’s halal food portfolio, and should present itself as a new pillar of growth in the longer-term.

Post-results, we tweaked our FY21E and FY22E earnings downwards by 5% each as we pencilled in weaker sales amid the alarmingly high number of Covid-19 cases recorded in both Malaysia and Thailand.

Maintain MARKET PERFORM with lower TP of RM32.55 (from RM33.80) based on a rolled forward FY22E PER of 28.0x, which is closely in-line with the stock’s 3-year mean. While the group’s sturdy fundamentals and resiliency as one of few large-cap F&B stocks could provide some degree of comfort under the current market uncertainty, the stock appears to be fairly valued at this juncture, in our view. Dividend could also be a slight dampener with the anticipated low yield of c.2%.

Risks to our call include: (i) slower/faster-than-expected growth in Thailand F&B business, and (ii) higher/lower-than-expected operating costs.

Source: Kenanga Research - 29 Jan 2021