London Biscuits (LBB) began its FY16 with a 2.6% YoY rise in earnings to RM5.2m for 1QFY16, while its turnover grew 3.4% to record RM90.6m, on the back of better performance across its manufacturing segments. We lower our FY16-FY17 estimates, as we understood from management that finance costs would remain elevated for a while, as LBB focuses on clearing their term loans and hire purchase credits. Regardless, we see the value in the company’s operations and future growth, as it slowly ramps up its utilization rates to fill in capacity. We retain our Outperform call with a lower TP of RM0.91, premised on 10x our FY17 EPS.

• LBB’s snacks segment almost doubled its turnover from last year at 94.1% YoY growth, supported by new selections including its potato chips segment. Sweets and candies segment revenue slightly declined by 8.0% compared to 1QFY15. Overall, domestic sales is slower compared to exports for the quarter, accounting for 45.3% and 54.7% of total sales respectively.
• On net gearing. LBB’s net gearing stood at 0.52x as at 1QFY16, which is 11.8% lower compared to 0.59x as at 4QFY15. It has also shown improvement from FY14 and FY13 at 0.61x and 0.67x respectively. We view this positively as management continue to improve its gearing position, although we understand that this would mean an elevated finance costs in the near term, before stabilizing at a lower level in the medium term, which should translate into higher earnings.
• Outlook. LBB continue to fill up its capacity steadily, while focusing on its distribution channels and looking into potential markets. The next growth phase for LBB remain on potato chips, which we expect to increase contribution to turnover by c.30% every year. Currently, potato chips only account for <5% of sales. Utilization rate for its 2 potato chips production line is at c.60% and c.35-40% respectively, which implies ample room for growth. The change of focus is mainly a move from having heavily flour-based and sugar-based products, and as potato chips command higher margins of GP c.25-30% compared to LBB’s current selections.

Source: PublicInvest Research - 1 Dec 2015