9MFY22 results came in slightly above our expectation as sales volume increased more than expected following the full reopening of the economy. While top-line held strong, EBITDA margin took a minor hit due to an increase in operating expenses. Overall, earnings were hit by the full effect of Cukai Makmur and net profit fell YoY. Post results, we increase our FY22F/FY23F net profit by 5.8%/3.1% and adjust our DCF-derived TP upwards 2.2% to RM11.45. Looking forward, we remain wary of inflationary pressure hurting their higher margin premium segment as well as longer-term challenges from government regulation. Maintain MARKET PERFORM.

Above expectations. 9MFY22 net profit came in above both our and consensus’ expectations, accounting for 78% of both full-year forecasts. We attribute the positive deviation to a higher-than-expected jump in sales volume following the lifting of pandemic restrictions. The dividend of 25.0 sen brings the total up to 67.0 sen, above our expectation but in-line with the increased earnings.

YoY, revenue grew 2.8%, in-line with the sales volume increase of 3.1% following the full reopening of the economy. Overall, the group saw a 0.8% decline in overall market share during 9MFY22. The group saw minor contractions in the premium and mid-range segments where market share fell by 0.7ppt and 1.1ppt, respectively. Otherwise, the group’s value-for money (VFM) segment grew 1ppt during 9MFY22. EBITDA only grew 1% as increased operating expenses ate into margin slightly.

Overall, the group was hit by the full effect of Cukai Makmur as tax expenses jumped 19.2% YoY. Core net profit (CNP) continued to contract YoY, falling 7.9% as the increased tax rate ate into earnings.

QoQ, revenue rose 4.6%, in-line with a 4.9% increase in sales volume due to the economic reopening. The group’s market share remained flat QoQ, as the premium and VFM segments saw marginal increase in market share at 0.2ppt for both segments. EBITDA margin saw similar growth at 2.6% QoQ while CNP was similarly hit by Cukai Makmur, falling 3.1% QoQ.

Outlook. We expect earnings to sustain at current levels going into 4QFY22. The group is expected to continue to benefit from the full reopening of the economy and the resuming of international tourism and travel is expected to bump up duty-free sales. However, we remain cautious of inflationary pressure and rising interest rates eating into consumer spending power. We believe the continued contractions in the premium and mid-range segments coupled with the increase in the VFM market share could indicate some downtrading within the customer base.

Looking at government regulation, the proposed legislation has sent mixed signals for the outlook of the group. On the positive end, the proposed tightening of borders to combat smugglers proposed in Budget 2023 is expected to have a positive effect on the group as the black market continues to be the main concern for the sector, controlling a majority of overall market share (57.7% as of May 2022). Conversely, the generational ban on smoking and vapour products limits the group’s long-term growth, though the effects are not expected to be heavy in the short term given the relatively small size of the targeted age demographic of 18-21 (<5%).

Earnings forecasts. We increase our FY22F/FY23F CNP by 5.8%/3.1% to reflect the increased volume. We also increase our FY22F/FY23F dividend to 9/9.2 sen respectively to reflect the increased earnings.

Maintain MARKET PERFORM. We increase our DCF-derived TP (WACC: 8.1%, TG: -2%) upwards by 2.2% from RM11.20 to RM11.45 to reflect the stronger earnings in FY22F/FY23F. However, amidst rising health consciousness and limited growth due to government regulation, we maintain MARKET PERFORM due to limited catalysts for long-term growth. We also apply a 5% discount based on a 2-star ESG rating as appraised by us. While the stock may appeal to yield seekers due to its high dividend yield of 8.7%, we also see limited prospects given the rising interest rate environment.

Source: Kenanga Research - 28 Oct 2022