1QFY21 CNP of RM10.9m (-15% YoY) came in within expectations at 22% and 20% of our and consensus’ respective forecasts. Declared dividend of 2.5 sen is also deemed within. Post-results, we maintain OUTPERFORM with a higher TP of RM2.75 on a rolled forward valuation base year as we continue to favour the name for its defensive earnings nature, solid balance sheet and attractive dividend yield of c.5%.

Within expectations. 1QFY21 core net profit (CNP) of RM10.9m is in line with expectations at 22% and 20% of our and street’s respective full year forecasts. Declared dividend of 2.5 sen (interim div: 2.0 sen; special div: 0.5 sen) is also deemed within.

Results’ highlights. YoY, 1QFY21 revenue dipped 11% to close at RM83.9m, as weaker domestic sales (-32%) overshadowed the better export sales (+12%). We believe the local contribution was largely impacted by lower retail footfall and disrupted distribution during MCO. Costs appear well contained YoY as EBIT was flat, with margin expanding 1.9 ppt. However, CNP dropped 15% on higher effective tax rate.

QoQ, revenue dropped by 7%, impacted by the start of the MCO while CNP fell 18%, as EBIT margin fell 2.1 ppt likely due to lower economies of scale on a sequential basis.

Anticipating a pickup in 2Q. As consumers ease into the new norm following the relaxation of movement restrictions in May, we believe the domestic market should recover in the coming quarter, premised on the normalisation of retail footfall post lockdown and the inelastic nature of coffee products. On top of that, the anticipated earnings recovery should be further supported by the group’s business transformation plan to achieve greater cost efficiency by continuously driving rationalisation exercises for its distributorships, sales force and factory operations. We also gathered that the group has been strengthening their online presence by setting up flagship stores at high-traffic e-commerce sites, with hopes to cater for the changing consumer shopping patterns.

Post-results, we made no changes to our earnings forecasts.

Reiterate OUTPERFORM with a higher TP of RM2.75 (from RM2.45 previously), following a rolled forward valuation base year of FY22E. Our TP is premised on an unchanged 20.0x PER, which is closely in-line with its 3-year mean. All-in, we continue to like the group for its defensive earnings nature on top of its continuous improvement in operational efficiencies, solid balance sheet and decent dividend yield of c.5%, which could offer some degree of defence against market uncertainty.

Risks to our call include: (i) lower-than-expected sales, (ii) higher than-expected commodity and marketing costs, and (iii) lower-than expected dividends.

Source: Kenanga Research - 27 Aug 2020