• Maintain NEUTRAL with higher TP of MYR3.84 from MYR3.66, offering 6.7% total return including dividend yield. FY19 (Apr) earnings were above expectations, after the group’s margins improved significantly. The operating environment however, is expected to remain challenging given uncertainties over raw material prices and FX trend moving forward. The group lacks earnings catalysts to drive profitability to the next level. Nevertheless, it continues to offer attractive prospective yields of 7.7%, backed by the group’s sturdy balance sheet and established brand names.

• Exceeded expectations. Apollo Food (Apollo) registered FY19 (Apr) core earnings of MYR17.6m (+59% YoY). This exceeded our expectations and accounted for 109% of our full-year estimates. Despite recording lower topline of MYR189m (-1% YoY), the improvement in margin helped Apollo to record higher earnings. Its gross margin improved to 24.8% compared to 21.1% in FY18. The group also managed to cut its operating expenses by c.10%. It recorded net profit of MYR3.8m (+182% YoY, +15% QoQ) in 4QFY19. Dividend of MYR0.20/share was declared (FY18: MYR0.20).

• Future looks uncertain. Given the uncertainty over raw material prices and FX trend, management expects the operating environment to remain challenging moving forward. The competitive market will likely limit Apollo’s sales growth, coupled with the absence of any significant expansion plans or new product launches. Therefore, earnings growth will likely only be obtained through improvements in operational efficiencies.

• Forecasts and key risks. We increase our FY20F-21F earnings estimates by 4.5% and 3% after adjusting our margin assumptions. Downside risk to our TP and recommendation is higher-than-expected input costs, while upside risk is the diversification into new product lines.

• Maintain NEUTRAL call on the stock, considering the lack of catalysts for future earnings growth. The challenging operating environment could also pose downside risk to earnings. Nevertheless, Apollo continues to offer attractive dividend yields of 7.7%, backed by its sturdy balance sheet, long standing good track record, and established brand name. We increase our TP slightly to MYR3.84 from MYR3.66, offering 6.7% total return. Our TP is derived from a target P/E of 17x (5-year mean) based on FY20F earnings.

Source: RHB Securities Research - 28 Jun 2019