Maintain NEUTRAL on Apollo Food with lower P/E-based TP of MYR3.59, from MYR3.68, representing total downside of 8%. Its results was below expectations due to the lower-than-expected sales in both local and export markets. Post-results, we cut our FY19-20 earnings forecasts by 11-13% to reflect our more conservative sales growth assumptions. Despite the lacklustre sales growth and lack of growth drivers, we believe its generous dividend payout, backed by a sturdy balance sheet, would continue to support the share price.

Results missed. Apollo Food’s FY18 (Apr) core net profit of MYR12.4m (-30.5% YoY) was below our expectations, after accounting for just 77% of our full year forecast. The negative deviation could be attributed to the lower-thanexpected sales in both local and export markets. This could be due to the soft market conditions as well as intense competition, in our view. The group has proposed DPS of MYR0.20 (FY17: MYR0.25), which implies yield of 4.8%.

Results review. YoY, FY18 revenue fell 8.7% to MYR190.8m, as both local and export markets recorded softer sales, for the above-mentioned reasons. FY18 gross profit margin expanded by 0.8ppt to 21.2%, we believe driven by more favourable cost dynamics. However, FY18 core net profit (after adjusting for MYR1.3m in disposal loss) still slumped, on the back of the lacklustre sales.

Outlook remains challenging. Management expects the higher costs of material and FX volatility to continue posing challenges in the competitive market environment. However, it expects to maintain its market position by implementing prudent measures and improving operational efficiency. We expect the flattish growth trend to continue, as we are not made aware of any large-scale expansion plans. We also believe the company may have to beef up its marketing initiatives and/or introduce new products, in order to arrest the uninspiring sales growth.

Earnings cuts. Post results, we cut our FY19F-20F earnings by 13% and 11% respectively to reflect our more conservative sales growth assumptions.

Maintain NEUTRAL, TP correspondingly lower at MYR3.59 (from MYR3.68) after rolling over our valuation base year to 2019. Our TP is based on unchanged P/E of 17x, in line with its 5-year mean P/E, and implies a c.23% discount to 2-year forward sector P/E of 22x.

Balanced risk-reward. We think the valuation is justified given the lack of growth drivers and susceptibility to fluctuations in raw material costs. However, this is balanced by its long-standing track record, established brand names, and sturdy balance sheet along with attractive forecast dividend yields.

Risks to our recommendation include a sharper-than-expected rise in input costs and diversification into new product lines.

Source: RHB Securities Research - 29 Jun 2018