1HFY22 earnings came in below expectations on account of an exceptionally long low fish landing cycle and still elevated feed costs. However top-line continued to be resilient and improving both YoY and QoQ given its diversified revenue base. TP remains at RM6.00 based on FY23E PER of 44x (5-year mean). We believe it is justified, premised on its resiliency and robust earnings growth potential from diversified revenue streams. Given the sharp price weakness, we upgrade call to OUTPERFORM.

Below expectations. 1HFY22 PATAMI of RM88m accounts for 31%/33% of our/market estimates as low fish landing cycle continued into 2QFY22 coupled with high feed costs. No dividend declared as expected which is normally declared in the final quarter.

YoY, while revenue improved 21% to RM2.47b, earnings continued to be eroded due to still elevated input costs and continuation of low fish landing cycle. Top-line was underpinned by improvements in both Palm Oil & Clean Energy Segment (POCE) and Integrated Livestock Farming (ILF) at >+100% and +27%, respectively to RM281m and RM1.64b. Marine Products Manufacturing sales were dragged by low landing fish cycle and the shortage of foreign fishing crew due to the pandemic. POCE sales was boosted the consolidation of Boilermech and improvement in CPO’s selling price while IFL’s higher sales stemmed from higher price of both feed raw material and eggs. Margins saw erosion of c.4ppt coming notably from IFL due to a combination of high feed costs and slow recovery in egg price. With ETR relatively stable, PATAMI fell 27% to RM88m.

QoQ, revenue improved to RM1.25b (+2%) offset by POCE (-17%) attributed to delay in project delivery and site installation by Boilermech and lower FFB tonnage processed. On a positive note, MPM improved (+5%) coming from improved fish landing activity as 50% of the fishing fleet resumed operations coupled with higher selling price. Likewise, for IFL which revenue improvement (+4%) was underpinned by higher egg selling price and improved feed raw material trading volume. EBIT saw 20% improvement coming from MPM’s higher margins due to higher selling price. Despite a higher ETR (+3ppt), PATAMI improved by 10 ppt to RM46m.

2HFY22 looks to be improving as 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) but we expect improvements ahead provided no further resurgence of the pandemic. POCE should see a better 2H with operations and site installation resuming coupled with a higher FFB production seasonally in the third quarter. However, IFL’s improvement will be offset by high feed costs.

Post results, our FY22E NP is revised down by 11% to RM255m on account of the weak 1H performance.

Upgrade to OUTPERFORM with unchanged TP of RM6.00 based on FY23E PER of 44x in-line with its 5-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 - 30 Nov 2021