Maintain NEUTRAL with a new P/E-based MYR3.66 TP from MYR3.59, offering 9% total downside (including dividend yield) after rolling over the valuation base year. While we believe the outlook is unexciting, given the lack of growth drivers and susceptibility to commodity price fluctuations, Apollo’s share price is likely to be supported by rewarding dividend yields of 6.8-7.8%. This is sustainable, given healthy cash flows and a sturdy balance sheet. As such, we believe the current valuation appears to fairly price in the stock’s fundamentals. We leave our earnings forecasts unchanged.

Apollo Food’s 1QFY19 (Apr) net profit of MYR4.2m (+11.2% YoY) was within our expectation, after reaching 26% of our forecast. YoY, revenue fell 7.7% to MYR43.1m. The group attributed this to weaker export sales. We believe this could be due to the lack of new product launches, coupled with a competitive market environment. However, Apollo’s net profit was largely driven by the improvement in gross margin (+5.8ppts), which we think is attributable to easing raw material prices.

Receding cost pressure to spur growth. Management expects the higher cost of materials and FX volatility to continue posting challenges in the competitive market environment. However, Apollo expects to maintain its market position by implementing prudent measures and improving operational efficiencies. As we are unaware of any large-scale expansion plans or new product launches, the flattish topline growth trend could continue moving forward. However, we expect the more favourable raw material price trends to support forecast earnings growth of 31% in FY19.

Forecasts and risks. Post results, we made no changes to our earnings forecasts. Risks to our recommendation include a sharper rise in input costs and diversification into new product lines.

Maintain NEUTRAL with our TP is lifted to MYR3.66 from MYR3.59, offering 9% total downside (including dividend yield). This is after rolling over the valuation base year to FY20 from 2019. The TP is based on an unchanged 17x P/E, which is in line with its 5-year mean P/E and implies a c.26% discount to 2- year forward sector P/E of 23x. We believe the valuation is fair considering the lack of growth drivers and susceptibility to fluctuations in raw material costs. However, they are balanced by Apollo’s long-standing track record, established brand names, and sturdy balance sheet while also offering attractive dividend yields of 6.8-7.8% to investors.

Source: RHB Securities Research - 28 Aug 2018