• Stay NEUTRAL with a new P/E-based MYR3.65 TP from MYR3.84, expected total return: 1.1%. Apollo Food’s results were below expectations, due to tepid sales and unfavourable FX trends. Post results, we cut our FY20F-22F (Apr) earnings 5% 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 – should continue to support the share price.

• Results missed. Apollo Food’s 1QFY20 core net profit of MYR3.2m (-23% YoY, -16% QoQ) was below our expectations – accounting for just 18% of our previous full-year forecast. The negative deviation could be attributed to lower-than-expected sales due to the soft market conditions and intense competition, in our view. No dividend was declared.

• Outlook remains challenging. Management expects the higher material costs and FX volatility to continue posing challenges in the competitive market environment. However, it expects to maintain its market position by implementing prudent measures, improving operational efficiency, and focusing on the service quality of existing products. We expect the flattish growth trend to continue, as we are not made aware of any large-scale expansion plans.

• Key risks and forecasts. Post results, we cut our FY20F-22F earnings 5% to reflect our more conservative sales growth assumptions. Sharper-thanexpected rises in input costs and diversification into new product lines could pose risks to our recommendation.

• We stick with our call with a new TP, which is derived from an unchanged target P/E of 17x (5-year mean) and revised 2020F earnings. We think the valuation is justified, given the lack of growth drivers and Apollo Food’s susceptibility to fluctuations in raw material costs. However, this is balanced by the attractive dividend yield of 7.7% on offer, backed by the company’s healthy cash flow generation and sturdy balance sheet. These factors should continue to support the share price.

Source: RHB Securities Research - 27 Aug 2019