Keep NEUTRAL and MYR3.66 TP, 7% expected total return. This is derived from a target P/E of 17x (5-year mean) based on FY20F earnings. While the stock continues to lack of potential sales boosters and is exposed to material costs and FX volatility, it still offers an attractive yield of 8% on Apollo’s steady operating cash flow and sturdy balance sheet. At current levels, we believe the valuation has been fully reflected in the share price. At MYR9.2m, 1HFY19 results were broadly in line with our expectations, accounting for 53% of our full-year forecasts. No dividend was declared.

Broadly in line. Apollo Food’s 1HFY19 (Apr) net profit came out broadly within with our expectations at MYR9.2m (+21.6% YoY) after reaching 53% of our fullyear forecast. The group’s 2QFY19 revenue decreased 10.3% YoY, affected by softer domestic sales that were likely due to the competitive market environment.

However, this was offset by lower opex and higher FX gains during the quarter – this translates into a net profit of MYR5m (+31.9% YoY, +20.3% QoQ). On a QoQ basis, net profit improved on sales growth of 8.3%. This was because 1QFY19’s sales were impacted by the Aidil Fitri festivities. No dividend was declared.

Absence of sales boosters. Moving forward, Apollo is likely to maintain its market position by implementing prudent measures and improving operational efficiencies. We also expect more favourable raw material prices in FY19 to help bolster earnings growth. However, management expects the higher cost of materials and FX volatility in the competitive environment to continue posing challenges to the group moving forward. The flattish sales growth is also likely to continue due to the absence of significant expansions plans or new product launches.

We made no changes to our earnings forecasts. The downside risk to our TP and recommendation is higher input costs, while diversification into new product lines is an upside risk.

Maintain NEUTRAL and MYR3.66 TP, which is derived from a target P/E of 17x (5-year mean) on FY20F earnings. The target P/E implies a c.26% discount to the 2-year forward sector P/E of 23x.

At current levels, we believe the valuation is fair, considering the lack of key catalyst to drive Apollo’s future earnings growth. The group’s exposure to fluctuations in raw material costs could also pose a downside risk to its earnings. Nevertheless, such risks are balanced by Apollo’s long-standing track record, established brand names, and sturdy balance sheet. The counter also offers attractive dividend yields of 8% to investors.

Source: RHB Securities Research - 28 Dec 2018