1QFY22 earnings came in below expectations on account of weaker sales from Marine activities and higher operating costs. Overall top-line remained robust given its diversified revenue base. Downgrade to MARKET PERFORM with a lower TP of RM6.00.

Below expectations. 1QFY22 PATAMI of RM42m accounts for 14%/15% of our/market estimates as re-emergence of low fish landing cycle and unforeseen drastic regional surge of the pandemic contributed to weaker sales from Marine Products Manufacturing (MPM). No dividend declared as expected which is normally declared in the final quarter.

YoY, Revenue improved 26% to RM1.22b underpinned by 152% surge from POCE (Palm Oil Activities & Clean Energy) to RM153m given the consolidation of Boilermech and higher CPO prices. Integrated Livestock Farming (ILF) saw an 33% uptick to RM801m due to higher feed raw material trading price. PBT fell 25% on higher MPM operating costs and unfavourable Ringgit against the Indonesian Rupiah in POCE activities. Despite ETR falling by 8ppt to 25%, PATAMI saw a 17% decline.

QoQ saw a marginal improvement in top-line dragged by an 11% decline in MPM revenue. While POCE saw 8% jump in revenue, ILF saw a moderate 4% uptick in revenue. POCE saw a sharp fall in PBT due to the one-off measurement gain of RM79m in the preceding quarter. With a higher ETR (+6ppt), PATAMI saw a 63% decline to RM42m. Stripping the one-off measurement gain, PATAMI declined by 17%.

Outlook. Despite the setback in 1QFY22, the group’s earnings are expected to be anchored by its MPM segment (historically taking up c.66% of group PBT), on the back of: (i) stable fish-cycle, coupled with (ii) persistently robust sales momentum especially from the frozen surimi-based products. MPM activities are historically lower in the 4Q of the financial year (due to monsoon) and we expect improvements ahead provided no further resurgence of the pandemic. The consolidation of Boilermech should solidify its top-line ahead where we expect double-digit contribution to top-line. Meanwhile, we expect FamilyMart (under ILF) to see gradual improvements ahead, mainly underpinned by normalising retail footfalls with the easing of movement restrictions. The group is on track to meet its FY22 target of 300 locations, with c.212 stores opened to date. Hence, we reiterate our view that this segment will be an exciting avenue of growth, premised on its high-margin fresh food content products. However, we take the view that margins will be challenging given volatile raw materials prices.

Post results, our FY22E is revised down by 8% to RM287m on account of weak MPM performance in the 1Q and challenging PBT margins.

Downgrade to MARKET PERFORM with a lower TP of RM6.00  (from RM6.90), based on 51x FY22E PER, closely in-line with +1.0SD over its 3-year mean. While valuation appears rich at this level, we believe it is justified, premised on its resiliency and robust earnings growth potential from diversified revenue streams.

Risk to our call: worse-than-expected MPM sales.

Source: Kenanga Research - 26 Aug 2021