While top-line remained robust, margins continued to be challenging amidst volatile commodity prices and operational costs. Moving ahead, top-line will largely be cushioned by solid in-home consumption, pipeline of new products and brand presence. While the Group stay robust and positioned for improvement, headwinds from challenging margins remain. Reiterate MARKET PERFORM - as capital upside appears limited, with poor dividend yields - with TP at RM143.6 on an unchanged 52x FY22E PER.

In line. At RM310m, 1HFY21 PATAMI is deemed inline, accounting for 50%/49% of our/market estimates. Dividend declared (DPS of 70.0 sen implying a payout of 53%) is also within expectations.

YoY, 1HFY21 top-line of RM2.83b (+7%) continued to be resilient given the prevailing restricted movements during the period. Its core F&B business continued to show robustness recording a +7% growth driven by in-home consumption and good momentum across most brands. Out-of-Home (OOH) activities continued on a gradual but firm recovery trend against low sales registered in the same period last year due to the impact of the MCO. Margins continued to be challenging falling 1ppt to 35% given the upside pressure on commodity prices. EBIT margin fell slightly (70bps) to 14.6% on account of higher depreciation and Covid-19 related expenses (RM50m). ETR remained low at 22% given the Reinvestment Allowance tax incentive for the Group’s new PBMS (plant-based meal solutions) manufacturing facility which also cushioned the additional Covid-19 expenses. As such PATAMI of RM310m saw a 6% uptick in tandem with top-line.

QoQ, given the high base from the previous quarter (due to the festive season) top-line fell 5% to RM1.38b. Top-line performance remained robust and above pre-pandemic levels. Margins remained challenging as both GP and EBITDA fell 1ppt/3ppt to 35%/13%, respectively, given the above-mentioned factors and higher marketing costs. On a plus side, the quarter saw further stream of new products; dairy-free version of Milo and Nescafe, Lively Tea and Kit Kat blocks. CNP fell 23% to RM134m compounded by a higher ETR of 24%.

Top-line to be robust but margins challenging. We expect revenue to remain buoyant riding on the progress of vaccine roll-outs and gradual reopening of the economy. Top-line should be driven 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 due to the expansion of its Maggi noodles production capacity, as well as foray into plant-based meal solutions with distribution into restaurants, retail stores and on-line platform which is advancing well at present. However, margins will still be challenged by: (i) still volatile commodity prices in 2021 compounded by an unfavorable Ringgit and (ii) higher capex for ESG initiatives and new projects currently being finalized to sustain growth that are likely to be funded by borrowings. However, we are still positive on stable commodity prices in FY22, seeing the GDT price index has remained on a downtrend on a MoM basis with 6-month forward contracts looking more or less the same.

Post results, we made slight revision to our FY21E/FY22E earnings by <1% on housekeeping matters.

MARKET PERFORM with a revised TP of RM143.60 (from RM142.90) on a unchanged FY22E PER of 52x implying 0.5SD above the stock’s 5-year mean. The defensive quality of its business model, solid global franchise and positioning as one of the very few large cap F&B stocks, clear ESG targets as well as being a FBMKLCI index member warrant above-market valuations. Entering the start of a new recovery cycle also warrants the application of above-mean valuation. However, given its limited dividend yield and projected capital upside of +7%, we reiterate our MARKET PERFORM call.

Risks to our call include: (i) stubborn elevated commodity prices, (ii) unfavourable Ringgit.

Source: Kenanga Research - 25 Aug 2021