As expected, F&N saw a robust top-line performance especially its Thai operation on account of the reopening of the economy and incoming festivities. Malaysian operation was affected by the December floods which disrupted domestic and export sales. Nevertheless, with the reopening of the economy and incoming festivities, we expect sales to continue to be robust in the coming quarters, but downside pressure on margins looks to persists for the remainder of the FY22. TP is raised to RM34.25 as we moved our valuation to FY23E PER of 28.5x. Reiterate OUTPERFORM.

Within expectations. 1QFY22 PATAMI of RM93m accounts for 23% of both our and consensus estimates on account of strong showing from Thai F&B as Malaysian operation was disrupted by the December 2021 floods. As expected, no dividend declared for this quarter.

YoY, top-line saw a 2.2% uptick to RM1.1b underpinned by the Thai operation (+3.0% to RM530m) with Malaysian operation at RM576m (+1.1%). In Thai Baht terms, revenue from Thai operations saw a +10% uptick but unfavorable RM/THB exchange translation led to lower percentage growth. The weak Malaysian operation was dragged by the December floods dampening operations and transportation with postponement of some export shipments. Malaysia operating profit fell 49% to RM23m but excluding the flood impact operating profit improved by 2.8% to RM46m. Thai operation was bolstered by the easing of lockdown while its exports saw double-digit growth spurred by a weaker Baht. Rising input costs pressured GP margins to ease by 5ppt to 26.9% with the flood impact and with EBITDA margin easing by 5ppt to 12.6% due to the aforementioned flood impact. PATAMI fell 32% to RM93m given the flood impact and rising input costs.

QoQ, top-line surged 24% given the reopening of the economy and coming from a low base (due to the FMCO). Both Malaysia and Thai operations saw double-digit top-line growth (+26% and +21%, respectively) due to higher export revenue and incoming festivities. Margins saw improvements on account of price adjustments to moderate the impact of rising input costs) partially offset by flood related damages.

Poised for growth. Premised on the easing of restrictions coupled with incoming festivities and pent-up demand, we see robust and sustained earnings ahead. Its investment into the Sri Nona Group has proven its worth in the 2021 festive season which is likely to continue in the coming festivities. Sri Nona is providing the platform to venture into the halal food segments, and more product offerings and also likely to expand its halal exports in MENA region and ASEAN. Despite the prevalent headwinds, the encouraging momentum of recovery of economic activities will continue to drive sales for year ahead, particularly for beverages and ready-to-drink business, out-of-home and HORECA channels. Rising input costs is the only dampening factor with leading indicators showing input prices looking only to recede in 2HCY22.

Post results, our FY22E numbers are revised down by 24% (on account of elevated input costs, flood impact and the prosperity tax) to RM299m.

Moving forward, we raised our TP to RM34.25 (RM32.45 previously) on a FY23 PER 5-year mean of 28.5x – which we feel is justified given its robust topline despite the pandemic sustained by its venture into the Halal food segments and growing exports fuelled by the ease of lockdown. Furthermore, its strong net cash position c. RM550m will easily absorb additional costs to sustain sales. Reiterate OUTPERFORM.

Risks to our call include: (i) pandemic proving resilient against the vaccinations, (ii) volatile commodity prices, and (iii) unfavourable Ringgit.

Source: Kenanga Research - 9 Feb 2022