Upgrade to HOLD with a higher TP of MYR2.68

2Q/1HFY3/19 results were above our expectation on higher-than- expected associate profit contribution. We raise our FY19E-21E associate profit contribution, resulting in a +22-28% FY19-21 earnings adjustments for AF. Consequently, our new TP is MYR2.68 (+47sen) based on an unchanged FY19 PER of 11.6x (5-year historical forward mean). We think investors could benefit from its good dividend yield prospect (>5%). Hence, we upgrade the stock to a HOLD.

Above our expectation

AF’s 2QFY19 net profit was higher at MYR15.8m (+6% YoY, +98% QoQ), which took 1HFY19 net profit to MYR23.8m (-18.5% YoY). The latter made up 65% of our full-year estimate (above our expectation). The beat was largely due to stronger associate profit contribution (from Muda Holdings; MUDA MK; Not Rated) of MYR5.1m (+>100% YoY, +>100% QoQ) and effective cost control in 2QFY19. The weak 1HFY19 revenue (-6% YoY) was expected due to softer sales recorded by the UK paper mill and insignificant contribution from its new food ware segment.

Associate profit outshines AF’s business

In 1HFY19, AF’s associate profit contribution came in above our expectation at MYR7.6m (+>100% YoY), representing 73% of our full-year forecast. The increase was mainly due to (i) better ASP of industrial paper and paper packaging products despite a drop in sales volume of industrial paper, and (ii) the reduction in unit cost of waste paper and better production cost control.

Raising forecasts

We raise our earnings forecasts for FY19/20/21E by 22%/23%/28% to incorporate higher associate profit contribution and slight margin improvement as the increase in raw material costs have been successfully passed through to customers. The Group proposed a first interim single tier DPS of 3sen for FY19 - 21% of our FY19E DPS. We expect the remaining of 11sen (vis-à-vis our forecast) to be declared in 3Q and 4QFY19. [Prior:SELL]

Source: Maybank Research - 03 Dec 2018