• Maintain SELL with unchanged MYR2.75 TP, 15% downside. Apollo Food recorded 4QFY20 (Apr) core earnings of MYR3.9m. The company’s sales were affected by the COVID-19 pandemic and implementation of the Movement Control Order (MCO). The weak demand may extend beyond the MCO as it may take time before consumer sentiment fully normalises. The risk-reward profile looks unfavourable to investors at the current level. The stock is trading at 19.8x P/E, above its historical average of 17x.

• Above expectation. Apollo recorded 4QFY20 (Apr) core net profit of MYR3.9m (+1.3% YoY, -2.3% QoQ), bringing FY20 core net profit to MYR14.2m (-19% YoY). This is above expectations at 118% of our full-year forecast as the COVID-19 impact on the group’s sales was less severe than our initial expectations. Apollo’s sales declined 8.8% YoY and 11.3% QoQ. The impact is likely to spill over into 1HFY21 as it will take time for consumer sentiment to fully recover to pre-pandemic levels. A DPS of 20 sen was declared.

• Recent spikes in prices of commodities like wheat, sugar and CPO could drive Apollo’s raw material costs higher and potentially affect its margin. Given the limited pricing power, we believe it may not be able to pass on the hike in costs to customers. This may cause margin erosion in upcoming quarters. Being a net exporter, the weakening of the MYR vs USD is a positive to the company. This is because it derives more than one-third of its revenue from exports, while over 90% of its raw materials are sourced locally.

• Maintain SELL with unchanged MYR2.75 TP. Our valuation is based on 17x target P/E of FY21F earnings. At the current level, the stock looks overvalued – it is trading at 19.8x P/E vs the 5-year mean of 17x. We believe the risk-reward profile at present is unfavourable to investors in view of Apollo’s lack of growth drivers, susceptibility to fluctuations in raw material costs, and the challenging economic environment ahead. We made no changes to our forecasts.

• Risks. A sharp drop in input costs and new product launches could pose upside risks to our recommendation

Source: RHB Securities Research - 30 Jun 2020