• Stay NEUTRAL with a new P/E-based MYR2.90 TP from MYR3.40, 9% upside. Apollo Food’s 3QFY20 results were below expectations, mainly due to higher-than-expected raw material prices and operating expenses. We are imputing more conservative margin assumptions, lowering FY20- 22F (Apr) earnings by 13-14%. Despite the lacklustre sales growth and absence of earnings growth drivers, we believe its generous dividend pay out – backed by a sturdy balance sheet – should continue to support the share price. Apollo enjoys net cash of MYR106.4m (MYR1.33/share).

• Below expectations. Apollo recorded 3QFY20 core net profit of MYR4m (-12.2% YoY, +26.8% QoQ), bringing 9MFY20 core net profit to MYR10.3m (-24.8% YoY). This is below expectations, accounting for just 66% of our previous full-year forecast. The group’s EBITDA margin was affected by higher-than-expected raw material price and operating expenses, shrinking 2 ppts compared to the same period last year. No dividend was declared.

• COVID-19 to hit earnings. The group’s upcoming quarter sales are likely to be affected by the implementation of the movement control order, adding to the already soft market conditions and strong competition. However, Apollo will continue to implement a cautious business plan, improve operational efficiency and focus on product quality. The recent weakening of the MYR vs USD would also help offset the negative impact to earnings. The company is a net exporter given that one-third of its sales are from exports, while about 90% of raw materials are sourced locally. Due to lack of a large-scale expansion plan to exponentially drive earnings, we expect the flattish growth trend to continue.

• Key risks and forecasts. We cut our FY20F-22F earnings by 13-14% respectively to reflect more conservative margin assumptions after the earnings miss. We also revise down our FY21-FY22 DPS forecast each to 15 sen (from 20 sen), implying 88% payout ratio. Sharper-than-expected rises in input costs and diversification into new product lines could pose risks to our recommendation.

• Maintain NEUTRAL with lower TP of MYR2.90 from MYR3.40 – derived from an unchanged target P/E of 17x (5-year mean) and revised FY21F earnings. We think the valuation is justified, given the lack of growth drivers and Apollo’s susceptibility to fluctuations in raw material costs. However, this is balanced by the attractive dividend yield of 5.6% on offer, backed by the company’s healthy cashflow generation and sturdy balance sheet. As of 31 Jan 2020, the company has a net cash position of MYR106.4m (no borrowings), or MYR1.33 per share. These factors should continue to support the share price.

Source: RHB Securities Research - 25 Mar 2020