FY22 came in above both our/consensus expectations on account of a robust domestic market and operational efficiency. Moving ahead, the easing of movement restrictions will see domestic sales remaining robust coupled with better ASPs. The Middle-East (ME) market looks likely to experience a slow recovery due to aftermath of sugar tax and pandemic. We believe GP margins will continue to be challenging given the logistical issue, elevated commodity prices and a weak Ringgit. Given its operational efficiency, we believe PAT margin will continue to remain robust; thus, TP is raised to RM1.70 with rating upgrade to OUTPERFORM.

Above expectations. FY22 PATAMI of RM26m came in above expectations accounting for 146%/134% of our/market estimates due to strong showing from the ME markets in 4Q and operational efficiency as COGS margin came in 6ppt lower (43%) than expected. A final DPS of 2.5 sen was declared tallying full-year DPS at 5.4 sen (86% payout).

Domestic leads the way. YoY, revenue saw a 13% uptick to RM348m underpinned by strong showing from the domestic market (+24% to RM204m) offset by flattish export markets. The ME export markets are slowly recovering from the effect of the sugar tax and drop in expats due to the pandemic. The export markets contributed 41% to top-line, a far cry to its pandemic days of c.51%. No major erosion was seen in gross profit margin of which we believe was due to: (i) better ASP, and (ii) raw material prices well locked for the rest of the financial year with coffee bean prices locked in until Sep 2022. EBITDA fell 13% to RM36m with margin crimped by 4ppt to 10% on account of higher spending on advertising and promotion (A&P) both in the local and overseas markets. A stable ETR saw PAT shedding 16% to RM26m with PAT margin ending 2ppt lower to 8%.

QoQ, stellar improvements in the ME markets (+44%) was dragged by a weak domestic market (-12%) giving a moderate rise in sales (+1%) to RM97m. GP margin remained robust given the improved ASP and prudent hedging. EBITDA margin saw 7ppt uptick to 16% as opex fell 6% (which we believe came from prudent A&P promotion). Improving margins coupled with lower ETR saw PATAMI ending >100% to RM13m with PAT margin improving 7ppt to 13%.

ME is still a challenge. Given the slow pace of recovery from the ME market, its unlikely this market will reach its pre-pandemic level in medium term. Export market will be weighed down by the weaker demand from the Middle East markets – due to a combination such as: (i) lower purchasing power, (ii) sugar tax, and (iii) unfavorable forex. Nevertheless given the reopening of the economy (especially the HORECA channels) we believe domestic markets will continue to see robust sales. Margins will continue to be challenging given the elevated commodity prices and logistics volatility. We believe that to offset the elevated inputs prices management will continue to front-load its inventory putting further upside pressure on costs. To offset the elevated inputs costs and benefit from the impending recovery we believe opex margins are likely to improve as management reduce A&P.

Post results, we raised our FY23E earnings by 29% to RM40m and introduce FY24E earnings.We believe FY23 will continue to be underpinned by the domestic market with EBITDA margin likely staying at 4Q level as management reduce opex. We also raise our FY23E DPS to 9.0 sen (7.0 sen previously) implying a payout of 94%.

OUTPERFORM. TP is raised to RM1.70 based on a FY23E PER of 17.7x (previously 18x) – implying 0.5SD below its 5-year mean – to account for elevated inputs. Given its attractive dividend yields of c.6%, we upgrade the stock to OUTPERFORM.

Risks to our call include: (i) lower-than-expected sales, and (ii) unfavorable Ringgit.

Source: Kenanga Research - 1 Jun 2022