We maintain our positive stance premised on the belief that the group’s prospect remains sturdy on: (i) greater operational efficiency, (ii) better cost environment, and (iii) innovative offerings to propel growth, amidst new challenges in UAE and Saudi in the form of sugar taxes. BUY with TP of RM2.75. based on an unchanged FY21E PER of 20.0x (in-line with its 3-year mean). A decent yield of c.4% could also offer some degree of defence against the current market uncertainties.

As of 1st of December 2019, the UAE Cabinet has levied a 50% excise tax on sugar sweetened beverages. This is anticipated to put some pressure on the group’s export business in the region as the imposed taxes will be passed on to consumers. In relation to this, management represented that certain measures are already in place to counter the price hike and keep demand intact. We reckon possible solutions could be in the form of more sugar free products or cheaper priced alternatives to mainstream products. We estimate sales in the UAE and Saudi to make up c.55% of the group’s exports (or c.29% of total sales).

Despite the disturbance in the Middle East, we are still fairly optimistic on the group’s prospect. This is premised on our belief that the group’s greater operational efficiency backed by a better cost environment driven by: (i) prudent A&P spending focusing on ROI, (ii) favourable locked-in raw material prices, and (iii) potentially lower taxes from overseas tax shelter.

Furthermore, sturdy top-line performances are expected to be further boosted by the group’s innovative offerings to penetrate new markets, for example the upcoming “Frenché Roast” range (to be launched within 4QFY20) is targeted at the growing 3-in-1 and Latte markets.

While the home ground remains anchored by steady demand for its core brands and a seasonal CNY boost from its “Ah Huat” products range, we believe performance will likely be driven by its export business, especially from the MENA region, which takes up c. 43% of the group’s total sales. An interim dividend payout of 2.0 sen is expected, whereas our FY20E total payout of 9.0 sen translates to a dividend yield of c.4%.

Source: Rakuten Research - 20 Jan 2020