malaysia industry focus malaysian consumer sector...marketing and distribution of petroleum products...
Post on 13-Apr-2020
3 Views
Preview:
TRANSCRIPT
ed-CK / sa- BC, PY
Sluggish turnaround
• Sluggish topline growth + Margin compression =
Sector theme for 2017
• Budget 2017 is mildly positive for the consumer
sector, but does not serve as a significant catalyst
• Potential election goodies – a theme to watch for
next year
• OldTown is top pick for the sector
Slower-than-expected recovery in consumer spending.
Despite the fading effect of GST (implemented in April 2015),
we observe that recovery in domestic consumer spending has
been slow, uneven and fragile. Our observation is supported by
the recent statistics released by the Malaysian Institute of
Economic Research (MIER) where the Consumer Sentiment
Index (CSI) dropped 5 points q-o-q to 74 points in September
and remains well below the threshold level of optimism of 100.
Besides that, private consumption growth (as a component of
GDP) has also moderated in 3Q.
Margin compression to stay. The recently concluded
3QCY16 results did not excite, with consumer stocks under our
coverage reporting more misses while none exceeded
expectations. The disappointing earnings were mainly driven by
(1) higher-than-expected operating cost and, (2) more
expensive imported inventories due to a weak ringgit. In fact,
we expect margin compression to be the key earnings
downside risk going forward for consumer stocks under our
coverage.
Potential election goodies? One theme to watch for in 2017
will be the potential election goodies next year to create feel-
good factor prior to general election (GE) as the government is
poised to hold a GE latest by May 2018.
Lack of catalysts. We remain cautious on the Malaysian
consumer sector as we do not foresee any significant re-rating
catalyst for the sector at this juncture. OldTown (BUY, TP:
RM2.15) remains our preferred pick in the sector in view of its
(1) resilient business models, (2) established brand names, (3)
strong balance sheets, (4) regional exposure to mitigate
(potential) domestic earnings risks, and (5) attractive value
proposition.
KLCIKLCIKLCIKLCI : : : : 1,641.421,641.421,641.421,641.42
Analyst King Yoong CHEAH +603 2604 3908 cheahky@alliancedbs.com Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com
STOCKS
Source: AllianceDBS, Bloomberg Finance L.P.
Closing price as of 9 Dec 2016
British American TobaccoBritish American TobaccoBritish American TobaccoBritish American Tobacco :::: Manufacturing and distribution of tobacco products
OldTown BerhadOldTown BerhadOldTown BerhadOldTown Berhad :::: Café chain operator & FMCG manufacturer
Padini HoldingsPadini HoldingsPadini HoldingsPadini Holdings :::: Apparel and accessories retailer with overwhelming domestic presence as well as exposure in high end, mid-end and value clothing segments for all age groups.
Sasbadi HoldingsSasbadi HoldingsSasbadi HoldingsSasbadi Holdings :::: Educational book publisher
MSM Malaysia HoldingsMSM Malaysia HoldingsMSM Malaysia HoldingsMSM Malaysia Holdings :::: Largest refined sugar manufacturer in Malaysia
QL ResourcesQL ResourcesQL ResourcesQL Resources :::: Agro-food producer involved in integrated livestock farming, marine products manufacturing and palm oil activities
Petronas DaganganPetronas DaganganPetronas DaganganPetronas Dagangan :::: PETRONAS' retail arm which involves in the marketing and distribution of petroleum products i.e. mogas, diesel, LPG, aviation fuel, fuel oil, kerosene oil, lubricant and asphalt in Malaysia.
MIER Consumer Sentiment Index and private consumption
growth
Source: Department of Statistics, MIER
DBDBDBDBS Group Research . Equity S Group Research . Equity S Group Research . Equity S Group Research . Equity
13 Dec 2016
Malaysia Industry Focus
Malaysian Consumer Sector
Refer to important disclosures at the end of this report
Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)
RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating
British American Tobacco
44.80 2,900 50.20 (11.4) (19.9) HOLD OldTown Berhad 1.86 190 2.15 (6.1) 34.8 BUY Padini Holdings 2.66 397 2.95 (11.6) 42.3 HOLD Sasbadi Holdings 1.36 86.1 1.58 18.3 8.8 BUY MSM Malaysia Holdings
4.76 759 3.00 (4.8) (0.6) FV QL Resources 4.40 1,245 4.60 1.4 3.3 HOLD
Petronas Dagangan 23.40 5,270 24.92 0.5 (5.6) HOLD
Industry Focus
Malaysian Consumer
Page 2
Table of Contents Gradual and fragile recovery 3
2017 budget 3
Potential election goodies 4
3QCY16 results review 4
Margin compression 4
M&A opportunities 5
Recommendation 5
Company Guides
British American Tobacco 7
MSM Malaysia 14
Oldtown 21
Padini 28
Petronas Dagangan 36
QL Resources 43
Sasbadi 50
Industry Focus
Malaysian Consumer
Page 3
Gradual and fragile recovery
Fragile recovery.Fragile recovery.Fragile recovery.Fragile recovery. More than six quarters have passed since
GST was implemented in April last year. While we observe
that its impact is gradually fading with a recovery in
consumer spending and visits to shopping malls, we noted
that the recovery has been slow, uneven and fragile. We
believe that the slower-than-expected recovery in consumer
spending was dragged by (1) slowing economic growth
momentum, (2) concerns over job prospects, (3) ringgit
volatility, (4) high household debt, and (5) higher cost of
living contributed partly by subsidies removal by the
government.
Source: Department of Statistics
Source: Department of Statistics
CSI declined qCSI declined qCSI declined qCSI declined q----oooo----q, private consumption growth moderated.q, private consumption growth moderated.q, private consumption growth moderated.q, private consumption growth moderated.
Our observation is supported by the recent statistics released
by the Malaysian Institute of Economic Research (MIER).
Since hitting a record low of 64 points in December 2015,
the Consumer Sentiment Index (CSI) has gradually recovered
to 79 points in June before dropping to 74 points (-5 points
q-o-q) in September. The CSI remains well below the
threshold level of optimism of 100. Besides that, private
consumption growth (as a component of GDP) has also
moderated q-o-q in 3Q.
Source: Various, AllianceDBS
Source: Department of Statistics, MIER
2017 budget
MMMMildly positive ildly positive ildly positive ildly positive but not a significant booster.but not a significant booster.but not a significant booster.but not a significant booster. Given the continued sluggish consumer sentiment, the government
has resorted to support consumer spending in Budget 2017
by proposing stimulus measures such as (1) raising BR1M
cash hand-outs to low-income earners, and (2) providing
special assistance of RM500 to all public servants, with a
special payment of RM250 to government retirees. As a
whole, we believe that this Budget will be mildly positive for
the consumer sector as the initiatives outlined will help to
offset the impact of rising cost of living, but do not serve as
a significant catalyst for the sector.
Excise hike for hard liquor, Excise hike for hard liquor, Excise hike for hard liquor, Excise hike for hard liquor, guessing game continuesguessing game continuesguessing game continuesguessing game continues for for for for
tobaccotobaccotobaccotobacco.... Although there was no announcement on excise
duty hikes for breweries and tobacco companies in Budget
2017, the authority has recently announced the 150%
exercise duty hike for locally produced hard liquor. Thus, we
continue to advise investors to exercise caution, as we do
not rule out a post-budget excise duty hike for tobacco
companies in the coming months.
Table 1 : Unemployment rate has been inching up, though remains at low level
Table 2 : Household debt to GDP (%) stayed high
Table 3 : Recent policy developments that could raise cost of living
Table 4 : CSI and private consumption growth moderated q-o-q
0
100
200
300
400
500
600
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
'000%Unemployed persons (rhs) Unemployment rate (lhs)
69.1 66.3 63.660.4
72.4 72.376.1
80.586.1 86.8 89.1 89.1
0
10
20
30
40
50
60
70
80
90
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Jul-
16
% to GDP
Effec tive dateEffec tive dateEffec tive dateEffec tive date ItemsItemsItemsItems Quantum of adjus tmentQuantum of adjus tmentQuantum of adjus tmentQuantum of adjus tment % change% change% change% change
29-J un-15 Cigarettes - excis e duty hike +RM0.30/pack of 20 2.2
15-Oct-15 S elected toll charges (18 intracity highways ) - Avg 40
4-Nov-15 Cigarettes - excis e duty hike +RM3.20/pack of 20 23.2
2-Dec-15 KTM railway charges +4 s en/km 36.4
2-Dec-15 LR T and Monorail charges - Avg 10
1-Mar-16 R emoval of flour s ubs idy +RM8.25/pack of 25kg 24.4
1-Mar-16 AlcoholVaries depending on alcohol content and
litre chargeBetween -10 & +10
1-J ul-16 Minimum wage hike +RM100 to RM1,000/mth for P enins ula 11.1
15-J ul-16 Natural gas tariffs revis ion for non-power s ector +RM1.52/MMBtu 6.0
1-Nov-16 R etail pump price adjus tment +15 s en/litre 7.0 - 8.6
1-Nov-16Cooking oil (various bottled packaging, except
1kg polybag)R eportedly between RM1.40/kg - RM1.82/kg 42.4 - 61.9 per kg
15-Dec-16 Locally produced hard liquor- excis e duty hike 150% 150%
50
60
70
80
90
100
110
120
130
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
sa % q-o-q Private consumption growth (lhs)
Consumer sentiments index (rhs)
Industry Focus
Malaysian Consumer
Page 4
Potential election goodies? Something hopeful. Something hopeful. Something hopeful. Something hopeful. One theme to watch for in 2017 will be
the potential election goodies next year. The government is
poised to hold a general election (GE) latest by May 2018
and the market is anticipating that the election will take
place in 2017, with some even expecting as early as 1Q
2017. Nevertheless, Dato' Sri Najib Tun Razak, the Prime
Minister of Malaysia, has dampened such expectations
recently by stating that he was in no hurry to call for an
election given the current lack of "feel-good factors"
among Malaysians. As such, we are not surprised if the
government announces additional stimulus measures next
year to create feel-good factors prior to an election.
3QCY16 results review
NNNNot ot ot ot such an such an such an such an appetiappetiappetiappetissssinginginging quarterquarterquarterquarter. . . . The recently concluded
3QCY16 results did not excite, with consumer stocks under
our coverage reporting more misses while none exceeded
expectations. The disappointing earnings were mainly driven
by (1) higher-than-expected operating cost (OldTown,
Sasbadi and QL), where the former was dragged by a higher
minimum wage implemented since July, and, (2) more
expensive imported inventories due to a weak ringgit (Padini
and MSM).
Source: AllianceDBS
Earnings outlook expected to Earnings outlook expected to Earnings outlook expected to Earnings outlook expected to remain sluggish.remain sluggish.remain sluggish.remain sluggish. The
underwhelming 3QCY16 results have reaffirmed our
cautious stance on the sector, where earnings prospects
going forward are expected to remain weak due to (1)
continued slow recovery in consumer spending, (2)
weakening ringgit that will inflate the cost of imported
materials, (3) higher minimum wage effective from July
2016 to add on to the cost pressure, and (4) an increasingly
competitive operating environment and weak consumer
market may restrict companies’ ability to pass on the rising
cost.
Margin compression
KKKKey drag ey drag ey drag ey drag onononon earnings. earnings. earnings. earnings. In fact, we expect margin
compression to be the key earnings downside risk going
forward for consumer stocks under our coverage. The
potential victims include Padini and MSM, with the former
sourcing about 70% of its products from China,
denominated in RMB, and the remainder mainly in USD. As
such, the ringgit’s persistent weakness against both
currencies could continue to increase Padini’s inventory cost
and put downward pressure on its margins in the coming
quarters. We are also concerned that the recent hike in
MSM’s selling price is not sufficient to cover the higher
production cost due to the significant increase in its USD-
denominated raw sugar costs.
OldOldOldOldTTTTown and BATown and BATown and BATown and BAT –––– actively addressingactively addressingactively addressingactively addressing margin compression margin compression margin compression margin compression
challenges.challenges.challenges.challenges. Meanwhile, we believe that potential margin
compression for OldTown’s FMCG operations, arising from
potentially higher cost of raw materials, is largely mitigated
in the near term as the group has locked in contract prices
for its coffee powder over the next seven months. There will
be an uptick in its non-dairy creamer cost in November,
which constitutes about 40% of its cost of goods sold, but
management will seek to mitigate this through
improvement in cost efficiency. On a positive note, the
higher export sales have enabled the group to benefit from
ringgit weakness against USD and RMB.
On the other hand, BAT has resorted to addressing margin
compression issues by closing its manufacturing factory
along Jalan Universiti, Petaling Jaya in stages up to 2HFY17
and has turned to sourcing tobacco products for the
domestic market from other British American Tobacco
Group’s factories in the region.
Source: Bloomberg Finance L.P.
Table 5 : 3QCY16 results summary table
Table 6 : Selective raw material costs (sugar and coffee powder)
Financia lFinancia lFinancia lFinancia l EPSEPSEPSEPS vs ADBSvs ADBSvs ADBSvs ADBS vs cons ens usvs cons ens usvs cons ens usvs cons ens us
CompanyCompanyCompanyCompany quarte rsquarte rsquarte rsquarte rs ChangeChangeChangeChange es timateses timateses timateses timates es timateses timateses timateses timates
BAT 3QFY16 ◄► Inline Inline
MSM Malaysia 3QFY16 ▼ Below Below
Oldtown 2QFY17 ◄► Below Below
Padini 1QFY17 ◄► Below Below
Petronas Dagangan 3QFY16 ◄► Inline Inline
Sasbadi Holdings 4QFY16 ◄► Below Below
QL Resources 2QFY17 ▼ Below Below
0
20
40
60
80
100
120
140
160
180
200
0
5
10
15
20
25
30
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Raw sugar price USD/lb Arabia coffee bean price USD/lb
Industry Focus
Malaysian Consumer
Page 5
M&A opportunities
M&A opportunities for cashM&A opportunities for cashM&A opportunities for cashM&A opportunities for cash----rich companies? rich companies? rich companies? rich companies? Given the current
challenging operating environment for the sector, companies
with healthy cash positions like OldTown and Sasbadi are
looking to engage in earnings-accretive acquisitions to boost
their growth prospects. OldTown is actively pursuing M&A
opportunities in F&B operations to enhance earnings while
Sasbadi has openly stated its desire of making at least one
value-accretive acquisition per annum to sustain growth.
Recommendation
Consumer spending recovery Consumer spending recovery Consumer spending recovery Consumer spending recovery –––– more gradual than anticipated.more gradual than anticipated.more gradual than anticipated.more gradual than anticipated.
While we remain cautiously optimistic that consumer spending
will continue along its recovery path moving to 2017,
supported by (1) government stimulus, (2) hike in minimum
wage in July, and (3) fading effect of GST, we remain
concerned that the slower-than-expected recovery (as indicated
by CSI) could be the ongoing theme for next year.
Remain cautiousRemain cautiousRemain cautiousRemain cautious on the Malaysian consumer sector as we do
not foresee any significant re-rating catalyst at this juncture.
Stock picksStock picksStock picksStock picks. . . . Given the concerns outlined above, we favour
stocks with (1) resilient business models, (2) established brand
names in their respective sectors to withstand the continued
challenging operating environment, (3) strong balance sheets
to undertake earnings-accretive M&A activities to drive growth
and/or engage in capital-management exercises to reward
shareholders, (4) regional exposure to mitigate (potential)
domestic earnings risks, and (5) attractive value propositions.
OldTownOldTownOldTownOldTown (BUY, TP: RM2.15)(BUY, TP: RM2.15)(BUY, TP: RM2.15)(BUY, TP: RM2.15) remains our preferred pick in the
sector.
Table 7: Peer Comparison
Sources: AllianceDBS, Bloomberg Finance L.P
Recomme
ndation
Target
Price
Current
Price
Market
CapCY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018
British American
Tobacco
HOLD 50.20 44.80 12,791.7 16.7x 16.5x 9% 1% 5.7% 5.8% 29.1x 26.6x 157% 168%
MSM Malaysia FULLY
VALUED
3.00 4.76 3,346.2 26.7x 27.9x (5%) (4%) 2.4% 2.3% 1.6x 1.6x 6% 6%
Oldtown BUY 2.15 1.86 839.7 13.6x 13.0x 8% 5% 3.6% 3.8% 2.1x 1.9x 16% 15%
Padini HOLD 2.95 2.66 1,750.0 11.2x 11.2x 6% 0% 3.8% 3.8% 3.0x 2.6x 29% 25%
Petronas Dagangan HOLD 24.92 23.40 23,246.8 26.3x 25.1x 4% 5% 2.9% 3.0% 4.3x 4.2x 17% 17%
QL Resources HOLD 4.60 4.40 5,491.3 23.0x 19.1x 16% 20% 1.3% 1.6% 2.9x 2.7x 13% 15%
Sasbadi Holdings BUY 1.58 1.36 380.0 15.8x 13.1x 29% 20% 3.2% 3.8% 2.3x 2.1x 15% 17%
Price/ BVPS ROAEP/E EPS Growth (YoY) Dividend Yield
Industry Focus
Malaysian Consumer
Page 6
Company GuidesCompany GuidesCompany GuidesCompany Guides
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:WMT, PY
HOLDHOLDHOLDHOLD (Upgrade from Fully Valued)
Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM44.80 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM50.20 (12% upside) (Prev RM50.20)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Negative. Sharper-than-expected TIV contraction
WhereWhereWhereWhere we differ:we differ:we differ:we differ: In line with consensus Analyst King Yoong CHEAH +60 32604 3908 cheahky@alliancedbs.com
What’s New • 9M16 results within expectation
• Prospects to remain challenging
• Upgrade to HOLD with TP of RM50.20, as the stock
has retraced >10% since our downgrade
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Revenue 4,582 4,026 4,058 4,090 EBITDA 1,277 1,035 1,059 1,071 Pre-tax Profit 1,231 1,033 1,020 1,033 Net Profit 910 742 765 775 Net Pft (Pre Ex.) 910 702 765 775 Net Pft Gth (Pre-ex) (%) 0.9 (22.9) 9.0 1.2 EPS (sen) 319 260 268 271 EPS Pre Ex. (sen) 319 246 268 271 EPS Gth Pre Ex (%) 1 (23) 9 1 Diluted EPS (sen) 319 246 268 271 Net DPS (sen) 312 234 255 258 BV Per Share (sen) 191 188 154 168 PE (X) 14.1 17.2 16.7 16.5 PE Pre Ex. (X) 14.1 18.2 16.7 16.5 P/Cash Flow (X) 13.1 19.4 16.0 15.8 EV/EBITDA (X) 10.2 12.5 12.3 12.1 Net Div Yield (%) 7.0 5.2 5.7 5.8 P/Book Value (X) 23.4 23.9 29.1 26.6 Net Debt/Equity (X) 0.5 0.3 0.5 0.4 ROAE (%) 170.0 137.0 156.8 168.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 244 263 271 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 8 H: 6
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Less Less Less Less smoky, still hazysmoky, still hazysmoky, still hazysmoky, still hazy Lacks nearLacks nearLacks nearLacks near----term reterm reterm reterm re----rating catalyst.rating catalyst.rating catalyst.rating catalyst. We upgrade our recommendation for British American Tobacco (BAT) to HOLD given that (1) the share price has retraced 12% since our downgrade, and (2) dividend of >5% should support its share price. Nonetheless, we remain cautious on the growth prospects in the Malaysian tobacco industry. The sector landscape is getting increasingly difficult due to: (1) declining cigarette consumption per capita because of an increasing health-conscious population; (2) continued high illicit trades; (3) regulatory risks; and (4) emergence of alternative product offerings such as e-cigarettes. 9M9M9M9M16 results 16 results 16 results 16 results within within within within expectations.expectations.expectations.expectations. The group registered a 3QFY16 core net profit of RM211m (+52% q-o-q, -18% y-o-y). This brings its 9M core earnings to RM524m, accounting for 75% of our full-year estimate, which we deem to be within expectation. The group declared an interim net DPS of 55 sen. This brings its total dividend payout for 9M16 to RM1.55, implying a payout ratio of 80% based on core earnings (103% payout ratio based on reported earnings). Valuation:
We upgrade our recommendation to HOLD with a higher DCF-
based TP of RM50.20, upon imputing a lower standardised
risk-free rate of 3.9% (previously 4%). While its dividend yield
of >5% should be supportive of the share price, we believe
that the cloudy earnings outlook could cap its upside potential,
particularly with illegal trades remaining high at c.50%
Key Risks to Our View:
High illicit trades and regulatory uncertainties remain the key
downside risks for the group. At A Glance Issued Capital (m shrs) 286
Mkt. Cap (RMm/US$m) 12,792 / 2,893
Major Shareholders (%)
British American Tobacco BV (%) 50
Skim ASB 6.3
Aberdeen Assets 5.0
Free Float (%) 38.7
3m Avg. Daily Val (US$m) 2.2
ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Tobacco
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
British American Tobacco Version 5 | Bloomberg: ROTH MK | Reuters: BATO.KL Refer to important disclosures at the end of this report
64
84
104
124
144
164
184
204
38.7
43.7
48.7
53.7
58.7
63.7
68.7
73.7
78.7
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
British American Tobacco (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 8
Company Guide
British American Tobacco
WHAT’S NEW
Within expectation
9M9M9M9M16 results16 results16 results16 results within expectationwithin expectationwithin expectationwithin expectation. . . . The group registered a
3QFY16 core net profit of RM211m (+52% q-o-q, -18% y-o-
y). The y-o-y decline in earnings was attributed to its top-line
declining by 20% on the back of the sharp drop in sales
volume (-32% y-o-y).
Nonetheless, its 3QFY16 core earnings improved on a q-o-q
basis despite the 3% drop in revenue. This was mainly
supported by (1) improved productivity, (2) adjustments of
overprovision of depreciation expenses in 2Q (depreciation
charge: -RM1.5m in 2QFY16 vs +RM0.5m in 3QFY16), and (3)
normalisation of tax rate (15% in 3QFY16 vs 36% in
2QFY16). 9M core earnings accounted for 75% of our full-
year estimate, which we deem to be within expectation.
The group declared an interim net DPS of 55 sen. This brings
its total dividend payout for 9M16 to RM1.55, implying a
payout ratio of 80% based on core earnings (103% payout
ratio based on reported earnings).
Illegal trades touching 50%.Illegal trades touching 50%.Illegal trades touching 50%.Illegal trades touching 50%. Management highlighted that
the sales volume was weighed down by illegal cigarette
trades, which reached a record high of 49.9% in May 2016
from 35.5% in August 2015. This was triggered by the
c.40% excise duty hike in Nov 2015, which reduced the
affordability of smokers.
Other key takeaways from the briefing:
Special dividend likely in 4QSpecial dividend likely in 4QSpecial dividend likely in 4QSpecial dividend likely in 4Q.... The group is closing its
manufacturing factory along Jalan Universiti, Petaling Jaya in
stages up to 1HFY17. It will resort to sourcing tobacco
products for the domestic market from other British American
Tobacco Group’s factories in the region, potentially from
Indonesia, Singapore and South Korea. The total net proceeds
(after deducting expenses related to the disposal exercise) of
RM208m should be received by Nov 2016, at which RM140m
will be paid out as special dividend, translating to 49
sen/share. We have imputed 49 sen/share into our dividend
forecasts of RM2.59 for FY16. This provides a yield of 5.2%.
Upgrade to HOLD, but remain cautious on its earnings Upgrade to HOLD, but remain cautious on its earnings Upgrade to HOLD, but remain cautious on its earnings Upgrade to HOLD, but remain cautious on its earnings
outlookoutlookoutlookoutlook.... We upgrade our recommendation for British
American Tobacco (BAT) to HOLD with a higher DCF-based
TP of RM50.20, upon imputing a lower standardised risk-free
rate of 3.9% (previously 4%). Our upgrade is supported by
(1) the share price retracing 12% since our downgrade, and
(2) dividend of >5% that could cushion the downsiderisk.
Nonetheless, we remain cautious on the growth prospects in
the Malaysian tobacco industry, particularly as we have not
seen signs of a top-line recovery for BAT and illegal trades
remain high at c.50%.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Revenue 1,162 963 932 (19.8) (3.2)
Cost of Goods Sold (724) (638) (609) (15.9) (4.5)
Gross ProfitGross ProfitGross ProfitGross Profit 438438438438 325325325325 323323323323 (26.2)(26.2)(26.2)(26.2) (0.6)(0.6)(0.6)(0.6)
Other Oper. (Exp)/Inc (86.5) (117) (73.0) (15.6) (37.7)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 351351351351 208208208208 250250250250 (28.8)(28.8)(28.8)(28.8) 20.320.320.320.3
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 0.0 0.0 0.0 nm nm
Net Interest (Exp)/Inc (2.0) (0.5) (3.0) (50.9) (478.1)
Exceptional Gain/(Loss) (2.4) (90.9) (2.9) (22.4) 96.8
PrePrePrePre----tax Profittax Profittax Profittax Profit 347347347347 117117117117 244244244244 (29.6)(29.6)(29.6)(29.6) 109.5109.5109.5109.5
Tax (90.0) (68.7) (35.8) (60.3) (48.0)
Minority Interest 0.0 0.0 0.0 nm nm
Net ProfitNet ProfitNet ProfitNet Profit 257257257257 47.947.947.947.9 209209209209 (18.8)(18.8)(18.8)(18.8) 335.4335.4335.4335.4
Net profit bef Except. 259 139 211 (18.4) 52.4
EBITDA 361 217 250 (30.7) 15.0
Margins (%)
Gross Margins 37.7 33.8 34.7
Opg Profit Margins 30.2 21.6 26.8
Net Profit Margins 22.1 5.0 22.4
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 9
Company Guide
British American Tobacco
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Pricing policy remains its key earnings driver. Pricing policy remains its key earnings driver. Pricing policy remains its key earnings driver. Pricing policy remains its key earnings driver. Operating in an
oligopoly industry with three leading players (BAT, JTI and Philip
Morris International) in the legalised market, the ability of BAT
to raise prices to pass on increased costs (mainly arising from sin
tax hikes), without affecting its market share and profit remains
its key earnings driver.
Commanding position helps to influence market pricing. Commanding position helps to influence market pricing. Commanding position helps to influence market pricing. Commanding position helps to influence market pricing. BAT
has a commanding market share of about 60% in the legalised
market in Malaysia. Such a dominant position has, to some
extent, allowed the group to be a price leader rather than a
price taker.
Ability to adjust its pricing strategy to maintain its earnings Ability to adjust its pricing strategy to maintain its earnings Ability to adjust its pricing strategy to maintain its earnings Ability to adjust its pricing strategy to maintain its earnings
growth is fast eroding. growth is fast eroding. growth is fast eroding. growth is fast eroding. Over the years, the group’s profit
margins and absolute earnings had been improving, driven by
effective pricing policy and increased productivity. Nonetheless,
we observe that the ability to adjust its pricing strategy to
maintain its profit growth is fast eroding, judging from its latest
quarterly results, which were affected by the c.40% hike in
excise duty back in Nov 2015.
High illicit trades and alternatives could drag earnings. High illicit trades and alternatives could drag earnings. High illicit trades and alternatives could drag earnings. High illicit trades and alternatives could drag earnings. Given
BAT’s dominant position in the legalised cigarette market, the
high illicit trades continue to be a drag on its earnings growth.
Despite recent strong enforcement activities by the authorities,
illicit trades remain high with >40% estimated total market
share. Besides that, the increasing popularity of other product
offerings such as e-cigarettes could pose a new challenge to the
industry.
Industry prospects toIndustry prospects toIndustry prospects toIndustry prospects to be increasingly challenging.be increasingly challenging.be increasingly challenging.be increasingly challenging. We are
negative on the Malaysian tobacco industry as the sector
landscape remains increasingly challenging due to: (1) declining
cigarette consumption per capita because of an increasingly
health-conscious population; (2) continued high illicit trades; (3)
regulatory risks; and (4) emergence of alternative product
offerings such as e-cigarettes.
Domestic Legitimate trade volume (bn sticks)
Illicit trade market share (%)
Total revenue (RM m)
Operating margin (%)
Source: Company, AllianceDBS
12.1
10.5
8.2 8.28 8.35
0.0
1.7
3.5
5.2
7.0
8.7
10.5
12.2
2014A 2015A 2016F 2017F 2018F
33.7 34.7
43 43 43
0.0
8.8
17.5
26.3
35.1
43.9
2014A 2015A 2016F 2017F 2018F
47964582
4026 4058 4090
0.00
978.38
1956.76
2935.15
3913.53
4891.91
2014A 2015A 2016F 2017F 2018F
25.727
24.8 25.2 25.2
0.0
5.5
10.9
16.4
21.8
27.3
2014A 2015A 2016F 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 10
Company Guide
British American Tobacco
Balance Sheet:
Healthy balance sheet.Healthy balance sheet.Healthy balance sheet.Healthy balance sheet. The group’s balance sheet remains
healthy despite net gearing position of about 0.5x, given the
strong cash generation of its business, which allows the group
to comfortably meet its debt obligations and maintain a high
dividend payout without overstretching its balance sheet.
Share Price Drivers:
Decent dividend yield. Decent dividend yield. Decent dividend yield. Decent dividend yield. Despite the increasingly challenging
industry outlook, BAT is viewed as a relatively defensive stock,
given its ability to sustain high cash flow generation, and
provide decent dividend yields of about 5%.
Key Risks:
High illicit trade.High illicit trade.High illicit trade.High illicit trade. Counterfeit and smuggled cigarettes could
continue to cap domestic sales volume.
High taxes.High taxes.High taxes.High taxes. The government may increase taxes on cigarettes,
in line with plans to improve public health.
Company Background
BAT is the leading manufacturer and distributor of cigarettes in
Malaysia. Its portfolio includes Dunhill, Pall Mall and Kent. The
group has a c.60% legal market share in Malaysia.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
3.3
3.4
3.4
3.5
3.5
3.6
3.6
3.7
3.7
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
2014A 2015A 2016F 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
50.0
100.0
150.0
200.0
250.0
2014A 2015A 2016F 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
2014A 2015A 2016F 2017F 2018F
Avg: 20.9x
+1sd: 22.5x
+2sd: 24.1x
-1sd: 19.4x
-2sd: 17.8x
14.7
16.7
18.7
20.7
22.7
24.7
26.7
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 33.3x
+1sd: 37.31x
+2sd: 41.31x
-1sd: 29.29x
-2sd: 25.28x
20.3
25.3
30.3
35.3
40.3
45.3
Dec-12 Dec-13 Dec-14 Dec-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 11
Company Guide
British American Tobacco
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Domestic Legitimate trade volume (bn sticks)
12.1 10.5 8.20 8.28 8.35
Illicit trade market share (%) 33.7 34.7 43.0 43.0 43.0
Total revenue (RM m) 4,796 4,582 4,026 4,058 4,090
Operating margin (%) 25.7 27.0 24.8 25.2 25.3
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 4,796 4,582 4,026 4,058 4,090
Cost of Goods Sold (3,084) (2,907) (2,674) (2,666) (2,684)
Gross ProfitGross ProfitGross ProfitGross Profit 1,7121,7121,7121,712 1,6741,6741,6741,674 1,3521,3521,3521,352 1,3921,3921,3921,392 1,4061,4061,4061,406 Other Opng (Exp)/Inc (480) (436) (354) (370) (373)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,2321,2321,2321,232 1,2381,2381,2381,238 998998998998 1,0221,0221,0221,022 1,0331,0331,0331,033 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (13.2) (6.7) (4.9) (1.5) 0.25
Exceptional Gain/(Loss) 0.0 0.0 39.8 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 1,2191,2191,2191,219 1,2311,2311,2311,231 1,0331,0331,0331,033 1,0201,0201,0201,020 1,0331,0331,0331,033 Tax (317) (321) (291) (255) (258)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 902902902902 910910910910 742742742742 765765765765 775775775775 Net Profit before Except. 902 910 702 765 775
EBITDA 1,277 1,277 1,035 1,059 1,071
Growth
Revenue Gth (%) 6.2 (4.5) (12.1) 0.8 0.8
EBITDA Gth (%) 8.0 0.0 (18.9) 2.3 1.1
Opg Profit Gth (%) 9.5 0.5 (19.4) 2.4 1.1
Net Profit Gth (Pre-ex) (%) 9.5 0.9 (22.9) 9.0 1.2
Margins & Ratio
Gross Margins (%) 35.7 36.5 33.6 34.3 34.4
Opg Profit Margin (%) 25.7 27.0 24.8 25.2 25.2
Net Profit Margin (%) 18.8 19.9 18.4 18.9 18.9
ROAE (%) 174.7 170.0 137.0 156.8 168.2
ROA (%) 68.0 73.4 62.0 67.4 69.9
ROCE (%) 91.9 101.3 81.4 92.7 96.9
Div Payout Ratio (%) 97.9 98.0 90.1 95.0 95.0
Net Interest Cover (x) 93.7 185.0 202.3 668.4 NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 12
Company Guide
British American Tobacco
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 1,162 1,058 1,021 963 932
Cost of Goods Sold (724) (686) (668) (638) (609)
Gross ProfitGross ProfitGross ProfitGross Profit 438438438438 372372372372 354354354354 325325325325 323323323323 Other Oper. (Exp)/Inc (86.5) (93.4) (122) (117) (73.0)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 351351351351 279279279279 231231231231 208208208208 250250250250 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (2.0) (1.0) (2.5) (0.5) (3.0)
Exceptional Gain/(Loss) (2.4) (5.2) 2.50 (90.9) (2.9)
PrePrePrePre----tax Profittax Profittax Profittax Profit 347347347347 273273273273 231231231231 117117117117 244244244244 Tax (90.0) (78.0) (55.6) (68.7) (35.8)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 257257257257 195195195195 176176176176 47.947.947.947.9 209209209209 Net profit bef Except. 259 200 173 139 211
EBITDA 361 288 241 217 250
Growth
Revenue Gth (%) 6.8 (8.9) (3.5) (5.7) (3.2)
EBITDA Gth (%) 21.6 (20.1) (16.6) (9.6) 15.0
Opg Profit Gth (%) 22.4 (20.6) (17.1) (10.0) 20.3
Net Profit Gth (Pre-ex) (%) 21.4 (23.0) (13.4) (19.8) 52.4
Margins
Gross Margins (%) 37.7 35.2 34.6 33.8 34.7
Opg Profit Margins (%) 30.2 26.3 22.6 21.6 26.8
Net Profit Margins (%) 22.1 18.4 17.2 5.0 22.4 Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 325 292 204 181 158
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 438 443 442 442 442
Cash & ST Invts 10.1 33.9 141 65.2 128
Inventory 263 234 206 208 209
Debtors 236 204 190 190 191
Other Current Assets 0.45 0.40 0.40 0.40 0.40
Total AssetsTotal AssetsTotal AssetsTotal Assets 1,2741,2741,2741,274 1,2071,2071,2071,207 1,1841,1841,1841,184 1,0871,0871,0871,087 1,1291,1291,1291,129
ST Debt
360 305 305 305 305
Creditor 268 305 292 292 293
Other Current Liab 84.0 16.7 16.7 16.7 16.7
LT Debt 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 37.2 34.0 34.0 34.0 34.0
Shareholder’s Equity 524 547 536 440 481
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 1,2741,2741,2741,274 1,2071,2071,2071,207 1,1841,1841,1841,184 1,0871,0871,0871,087 1,1291,1291,1291,129
Non-Cash Wkg. Capital 147 117 87.3 90.2 91.7
Net Cash/(Debt) (350) (271) (164) (240) (177)
Debtors Turn (avg days) 16.6 17.5 17.8 17.1 17.0
Creditors Turn (avg days) 30.1 36.5 41.3 40.5 40.3
Inventory Turn (avg days) 33.5 31.7 30.5 28.7 28.8
Asset Turnover (x) 3.6 3.7 3.4 3.6 3.7
Current Ratio (x) 0.7 0.8 0.9 0.8 0.9
Quick Ratio (x) 0.3 0.4 0.5 0.4 0.5
Net Debt/Equity (X) 0.7 0.5 0.3 0.5 0.4
Net Debt/Equity ex MI (X) 0.7 0.5 0.3 0.5 0.4
Capex to Debt (%) (3.3) 3.0 (66.8) 4.7 4.7
Z-Score (X) 17.2 18.9 18.2 18.7 18.6
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 13
Company Guide
British American Tobacco
Cash Flow Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 1,219 1,231 1,033 1,020 1,033
Dep. & Amort. 45.1 39.6 37.3 37.5 38.1
Tax Paid (329) (399) (291) (255) (258)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 31.3 97.6 29.8 (2.9) (1.5)
Other Operating CF 11.9 9.96 0.93 1.53 (0.3)
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 978978978978 980980980980 661661661661 801801801801 811811811811 Capital Exp.(net) 11.7 (9.0) 204 (14.4) (14.4)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 2.43 9.31 3.55 6.95 8.73
Net Investing CFNet Investing CFNet Investing CFNet Investing CF 14.114.114.114.1 0.300.300.300.30 207207207207 (7.4)(7.4)(7.4)(7.4) (5.7)(5.7)(5.7)(5.7) Div Paid (882) (891) (752) (861) (734)
Chg in Gross Debt (150) (55.0) 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (15.6) (9.2) (8.5) (8.5) (8.5)
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (1,048)(1,048)(1,048)(1,048) (955)(955)(955)(955) (761)(761)(761)(761) (870)(870)(870)(870) (742)(742)(742)(742)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash (55.6) 24.8 107 (75.9) 63.2
Opg CFPS (sen) 332 309 221 282 285
Free CFPS (sen) 347 340 303 276 279
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: King Yoong CHEAH
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 18 Feb 16 55.84 58.00 HOLD
2: 18 Mar 16 55.30 58.00 HOLD
3: 27 Apr 16 52.10 51.40 HOLD
4: 09 Jun 16 50.34 51.40 HOLD
5: 27 Jul 16 49.80 49.80 FULLY VALUED
6: 25 Oct 16 49.24 50.20 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
5
6
40.85
45.85
50.85
55.85
60.85
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (Downgrade from HOLD) Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM4.76 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM3.00 (-37% downside) (Prev RM3.00)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger ringgit, higher domestic volume
Where Where Where Where we differ:we differ:we differ:we differ: Lower margins assumption Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com
What’s New • Earnings below our/consensus expectations
• 3Q16 earnings dropped by 64% y-o-y, due to
higher raw sugar prices
• Gloomy outlook unless the government increases
domestic retail sugar ceiling price
• Downgrade to FULLY VALUED with TP of RM3.00
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Revenue 2,307 2,404 2,425 3,248 EBITDA 419 273 294 292 Pre-tax Profit 378 178 169 161 Net Profit 281 133 126 120 Net Pft (Pre Ex.) 281 133 126 120 Net Pft Gth (Pre-ex) (%) 9.2 (52.8) (5.3) (4.4) EPS (sen) 39.9 18.9 17.9 17.1 EPS Pre Ex. (sen) 39.9 18.9 17.9 17.1 EPS Gth Pre Ex (%) 9 (53) (5) (4) Diluted EPS (sen) 39.9 18.9 17.9 17.1 Net DPS (sen) 26.0 12.3 11.6 11.1 BV Per Share (sen) 291 283 289 294 PE (X) 11.9 25.2 26.7 27.9 PE Pre Ex. (X) 11.9 25.2 26.7 27.9 P/Cash Flow (X) nm 7.2 14.0 nm EV/EBITDA (X) 8.7 13.7 13.4 14.1 Net Div Yield (%) 5.5 2.6 2.4 2.3 P/Book Value (X) 1.6 1.7 1.6 1.6 Net Debt/Equity (X) 0.1 0.2 0.3 0.4 ROAE (%) 14.1 6.6 6.2 5.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 22.1 27.3 29.1 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 0 S: 6 H: 1
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Current price is not sustainable Escalation of raw sugar priceEscalation of raw sugar priceEscalation of raw sugar priceEscalation of raw sugar pricessss.... We downgrade our call to FULLY VALUED and revised down our TP to RM3.00 as we cut our FY16F/17F/18F earnings by 36%/42%/56% on expectations of MSM’s production cost rising by 15% in FY16F, due to the recent increase in raw sugar prices and strengthening USD. We expect raw sugar prices to remain elevated as raw sugar is running a global supply deficit that is expected to reach 4-5m MT in 2017 as a result of drought affecting sugar production in India, Thailand and Brazil. We expect this condition to worsen in FY17/FY18 due to the increase in production costs that cannot be passed on as the average selling price of domestic sugar in Malaysia is still fixed at a price ceiling of RM2.84 per kg. Bidding to be a regional player.Bidding to be a regional player.Bidding to be a regional player.Bidding to be a regional player. MSM is building a new sugar refinery at Port Tanjung Pelepas (PTP), Johor, capable of producing 1.1m MT refined sugar p.a. The refinery is targeted to be completed in early FY18, and will reportedly have 30-35% lower processing cost upon full capacity operation. But the refinery’s margins will be lower than its existing operations, as it is intended to serve the competitive export market. We believe its next export focus will be Indonesia, given the establishment of a representative office in Jakarta in 1Q16. Opening of Dubai trading platform.Opening of Dubai trading platform.Opening of Dubai trading platform.Opening of Dubai trading platform. MSM registered commodity gains of RM103m in YTD FY16 owing to the opening of its Dubai trading operations. The new trading platform will fully take over the role of purchasing raw sugar, which was previously done by MSM’s refinery. This move allows MSM to improve the management of its cost (which can be volatile), in light of the fact that the trading platform provides better access to the global raw sugar market. Valuation:
We downgrade our rating to FULLY VALUED with a lower TP
of RM3.00 (previously RM4.60) after our earnings revision;
based on 17x FY17F PE (5-year mean).
Key Risks to Our View:
Weaker ringgit against USD.Weaker ringgit against USD.Weaker ringgit against USD.Weaker ringgit against USD. Raw sugar costs, which make up
c.82% of the group’s opex, are transacted in USD. If the
ringgit continues to weaken against the USD, this could put
pressure on the group’s bottomline. At A Glance Issued Capital (m shrs) 703 Mkt. Cap (RMm/US$m) 3,346 / 757 Major Shareholders (%) Felda Global Ventures Sugar 54.2 Koperasi Permodalan Felda 20.0 Employees Provident Fund 5.3 Free Float (%) 20.6 3m Avg. Daily Val (US$m) 0.33 ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Food Producers
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
MSM Malaysia Holdings Version 4 | Bloomberg: MSM MK | Reuters: MSMH.KL Refer to important disclosures at the end of this report
73
93
113
133
153
173
193
213
4.1
4.3
4.5
4.7
4.9
5.1
5.3
5.5
5.7
5.9
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
MSM Malaysia Holdings (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 15
Company Guide
MSM Malaysia Holdings
WHAT’S NEW
Being kept at bay
• MSM Malaysia booked a net profit of RM23m in 3Q16 (-
64% y-o-y; -2% q-o-q), which came in below our and
consensus forecasts. The drop in earnings was due to
higher raw sugar costs and a weakened ringgit
compared to the previous year.
• 3Q16 revenue grew by 16% y-o-y on the back of a 7%
increase in overall ASP. However, this was negated by
the 23% increase in production cost. Consequently,
gross margin dropped by 6ppts y-o-y to 12.3% due to
higher raw sugar costs, coupled with the ringgit’s
depreciation compared to the previous year. Raw sugar
costs were 0.2030 USD/lb in 3Q16 compared to 0.15
USD/lb in 3Q15. The group’s average MYR/USD was at
RM4.04 in 3Q16 compared to RM3.88 in 3Q15.
• MSM registered commodity gains of RM39m in 3Q16
(YTD FY16: RM103m) owing to the opening of its Dubai
trading operations.
Operational Highlights
• Domestic volume grew by 51% y-o-y to 127,298MT in
3Q16. The improvement in volume was due to increase
in local demand and shift in sales mix from the ceasing
of the issuance of Approved Permits (AP) from 2Q16.
Based on the Department of Statistics’ data, local
manufacturing volume of refined sugar increased by 5%
y-o-y to 422,051MT in 3Q16. Domestic ASP was flat y-o-
y at RM2.60/kg.
• Industrial volume dropped 24% y-o-y to 93,587MT in
the quarter. ASP rose by 7% y-o-y to RM2.22/kg.
• Export volume dropped by 23% y-o-y to 30,692MT in
3Q16. ASP dropped by 4% y-o-y to RM1.73/kg in the
quarter, in tandem with global refined sugar prices.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Revenue 546 634 633 15.9 (0.1)
Cost of Goods Sold (445) (548) (556) 25.0 1.5
Gross ProfitGross ProfitGross ProfitGross Profit 101101101101 85.985.985.985.9 76.876.876.876.8 (24.3)(24.3)(24.3)(24.3) (10.6)(10.6)(10.6)(10.6)
Other Oper. (Exp)/Inc (14.7) (51.3) (42.8) 191.8 (16.6)
Operating Operating Operating Operating ProfitProfitProfitProfit 86.886.886.886.8 34.634.634.634.6 34.034.034.034.0 (60.8)(60.8)(60.8)(60.8) (1.7)(1.7)(1.7)(1.7)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 0.0 0.0 0.0 nm nm
Net Interest (Exp)/Inc (2.3) (3.6) (1.3) 43.3 63.5
Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm
PrePrePrePre----tax Profittax Profittax Profittax Profit 84.584.584.584.5 31.131.131.131.1 32.832.832.832.8 (61.3)(61.3)(61.3)(61.3) 5.45.45.45.4
Tax (20.7) (7.4) (9.5) (54.3) 27.7
Minority Interest 0.0 0.0 0.0 nm nm
Net ProfitNet ProfitNet ProfitNet Profit 63.963.963.963.9 23.723.723.723.7 23.323.323.323.3 (63.5)(63.5)(63.5)(63.5) (1.6)(1.6)(1.6)(1.6)
Net profit bef Except. 63.9 23.7 23.3 (63.5) (1.6)
EBITDA 92.6 44.1 43.9 (52.6) (0.5)
Margins (%)
Gross Margins 18.6 13.6 12.1
Opg Profit Margins 15.9 5.5 5.4
Net Profit Margins 11.7 3.7 3.7
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 16
Company Guide
MSM Malaysia Holdings
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Topline growth mainly driven by ASP movements.Topline growth mainly driven by ASP movements.Topline growth mainly driven by ASP movements.Topline growth mainly driven by ASP movements. We expect
MSM’s output to be relatively stable on a y-o-y basis, pending
the completion of the new PTP sugar refinery in early FY18.
Thus, topline growth will be driven largely by changes in
blended ASP. This in turn is dependent on the sales mix, as the
domestic segment has the highest ASP, followed by the
industries and exports segments. MSM’s strategy is to run the
refinery at an optimal utilisation rate (c.92%), and then sell
whatever it can to the domestic and industries customers, and
export the remainder of the output to foreign markets. We
believe its next export focus will be Indonesia, given the
establishment of a representative office in Jakarta in 1Q16.
Shifting sales mix towards the industries segment.Shifting sales mix towards the industries segment.Shifting sales mix towards the industries segment.Shifting sales mix towards the industries segment. In FY15,
there has been a notable shift of volume from domestic to the
industries segment, leading to a 3% fall in MSM’s blended ASP.
This was because several domestic customers are now
reclassified as industrial users. Although domestic volume
dropped by 16% in FY15 due to the reclassification, we forecast
domestic volume to grow by 24% in FY16F due to improved
local demand recorded in 2Q16. Based on the Department of
Statistics’ data, local manufacturing volume of refined sugar
had increased by 19% y-o-y to 895,858 MT in 1H16. Moreover,
we foresee a slowdown in volume growth for the industries
segment due to the ceasing of the issuance of Approved
Permits (AP) from 2Q16. Export volume is expected to remain
flat during this period up to the completion of the new PTP
sugar refinery.
Blended ASP Blended ASP Blended ASP Blended ASP to improve by 3% in FY16F.to improve by 3% in FY16F.to improve by 3% in FY16F.to improve by 3% in FY16F. We forecast MSM’s
blended ASP to improve by 3% to RM2.27/kg in FY16F, given
the improvement in high-yielding domestic volume (+24% y-o-
y). Thereafter, we forecast blended ASP to remain flat in FY17F,
and consequently dropping by 7% in FY18F due to increase in
export volume. While we expect domestic volume to remain
constant until FY18F, the positive impact on blended ASP will be
mitigated by the increasing contribution from the lowest
yielding export sales.
Volatile currency Volatile currency Volatile currency Volatile currency and raw sugar priceand raw sugar priceand raw sugar priceand raw sugar pricessss.... Raw sugar prices have
fallen by 26% y-o-y in FY15. As such, MSM’s unit production
cost fell by 6% in FY15. However, due to the weakened ringgit
compared to previous years, we expect unit production cost to
rise by 8% in FY16F, coupled with the recent higher raw sugar
cost in USD. Unit production cost is assumed to improve
gradually in FY17F-FY18F as the Dubai office will fully be
managing the purchases of raw sugar for the group, coupled
with the completion of the new PTP sugar refinery.
Domestic Volume (MT)
Industries Volume (MT)
Exports Volume (MT)
Blended ASP (RM/kg)
Production Cost (RM/kg)
Source: Company, AllianceDBS
455073
392953
487877 502514 517589
0.0
74680.7
149361.4
224042.2
298722.9
373403.6
448084.3
522765.0
2014A 2015A 2016F 2017F 2018F
346252
465340
424241 424241454605
0.0
94929.3
189858.6
284787.8
379717.1
474646.4
2014A 2015A 2016F 2017F 2018F
187965 175795
121969 107333
505272
0.00
103075.42
206150.85
309226.27
412301.70
515377.12
2014A 2015A 2016F 2017F 2018F
2.25 2.182.27 2.29
2.14
0.0
0.5
0.9
1.4
1.8
2.3
2014A 2015A 2016F 2017F 2018F
1.821.72
1.98 21.92
0.0
0.4
0.8
1.2
1.6
2.0
2014A 2015A 2016F 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 17
Company Guide
MSM Malaysia Holdings
Balance Sheet:
Gearing for expansion plan.Gearing for expansion plan.Gearing for expansion plan.Gearing for expansion plan. Capex for the PTP sugar refinery is
expected to cost USD260m, while maintenance capex is
assumed to be c.RM40m p.a. We believe there is sufficient
room for MSM to gear up to fund these capex commitments
without cutting its dividend payout. MSM was in a net cash
position in FY14, but registered a net gearing of 0.1x in FY15.
We forecast MSM to record a net gearing of 0.1x/0.2x/0.2x in
FY16F/17F/FY18F.
Share Price Drivers:
Earnings outlook.Earnings outlook.Earnings outlook.Earnings outlook. MSM’s earnings outlook is a function of its
blended ASP and unit production cost. Blended ASP is
predominantly driven by the changing sales mix, as the
domestic segment has the highest ASP, followed by industries
and exports segments. Production cost is determined by raw
sugar prices and forex rate (i.e. RM/USD).
ProProProProposed sugar refinery in PTP.posed sugar refinery in PTP.posed sugar refinery in PTP.posed sugar refinery in PTP. The proposed sugar refinery in
PTP could be a re-rating catalyst for the stock, as it could
significantly increase the group’s capacity (by adding another
1.1m MT in capacity), and lower its processing cost by 30-35%.
However, this is a longer-term catalyst as the refinery is targeted
to be completed only in early FY18. Additionally, the PTP plant’s
margins will be lower than the group’s existing operations, as it
is intended to serve the competitive export market.
Key Risks:
Weaker ringgit against USD.Weaker ringgit against USD.Weaker ringgit against USD.Weaker ringgit against USD. Raw sugar costs, which make up
c.82% of the group’s opex, are transacted in USD. If the
ringgit continues to weaken against the USD, this could put
pressure on the group’s bottomline.
Company Background
MSM is a major sugar producer in Malaysia with an annual
capacity of over 1.1m tonnes. It produces, markets and sells
refined sugar products.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
0.7
0.8
0.8
0.9
0.9
1.0
1.0
0.00
0.10
0.20
0.30
0.40
0.50
2014A 2015A 2016F 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
2014A 2015A 2016F 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2014A 2015A 2016F 2017F 2018F
Avg: 17.5x
+1sd: 23.1x
+2sd: 28.7x
-1sd: 11.9x
-2sd: 6.3x5.6
10.6
15.6
20.6
25.6
30.6
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 1.81x
+1sd: 1.92x
+2sd: 2.03x
-1sd: 1.7x
-2sd: 1.59x
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
Dec-12 Dec-13 Dec-14 Dec-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 18
Company Guide
MSM Malaysia Holdings
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Domestic Volume (MT) 455,073 392,953 487,877 502,514 517,589
Industries Volume (MT) 346,252 465,340 424,241 424,241 454,605
Exports Volume (MT) 187,965 175,795 121,969 107,333 505,272
Blended ASP (RM/kg) 2.25 2.18 2.27 2.29 2.14
Production Cost (RM/kg) 1.82 1.72 1.98 2.00 1.92 Segmental Breakdown
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)
Domestic 1,226 999 1,268 1,307 1,346
Industries 726 976 891 891 955
Exports 318 295 207 190 894
TotalTotalTotalTotal 2,2812,2812,2812,281 2,3072,3072,3072,307 2,4042,4042,4042,404 2,4252,4252,4252,425 3,2483,2483,2483,248
EBIT (RMm) Domestic 397 322 305 300 353
Industries 95.5 175 52.9 41.5 83.1
Exports (24.7) (7.7) (33.6) (25.0) (74.8)
TotalTotalTotalTotal 467467467467 489489489489 324324324324 317317317317 362362362362
EBIT Margins (%) Domestic 32.4 32.2 24.0 23.0 26.3
Industries 13.1 17.9 5.9 4.7 8.7
Exports (7.8) (2.6) (16.2) (13.2) (8.4)
TotalTotalTotalTotal 20.520.520.520.5 21.221.221.221.2 13.513.513.513.5 13.113.113.113.1 11.111.111.111.1
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 2,281 2,307 2,404 2,425 3,248
Cost of Goods Sold (1,814) (1,818) (2,080) (2,108) (2,886)
Gross ProfitGross ProfitGross ProfitGross Profit 467467467467 489489489489 324324324324 317317317317 362362362362
Other Opng (Exp)/Inc (132) (112) (140) (145) (196)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 335335335335 377377377377 184184184184 172172172172 165165165165 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 9.17 0.32 (6.2) (3.3) (3.9)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 344344344344 378378378378 178178178178 169169169169 161161161161 Tax (87.3) (96.8) (45.7) (43.3) (41.4)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 257257257257 281281281281 133133133133 126126126126 120120120120 Net Profit before Except. 257 281 133 126 120
EBITDA 382 419 273 294 292
Growth
Revenue Gth (%) 3.6 1.1 4.2 0.9 33.9
EBITDA Gth (%) (2.2) 9.5 (34.8) 7.9 (0.8)
Opg Profit Gth (%) (3.9) 12.6 (51.1) (6.7) (4.0)
Net Profit Gth (Pre-ex) (%) 0.9 9.2 (52.8) (5.3) (4.4)
Margins & Ratio
Gross Margins (%) 20.5 21.2 13.5 13.1 11.1
Opg Profit Margin (%) 14.7 16.4 7.7 7.1 5.1
Net Profit Margin (%) 11.3 12.2 5.5 5.2 3.7
ROAE (%) 13.5 14.1 6.6 6.2 5.9
ROA (%) 11.0 10.7 4.7 4.1 3.5
ROCE (%) 11.8 11.7 5.3 4.6 4.0
Div Payout Ratio (%) 65.6 65.1 65.1 65.1 65.1
Net Interest Cover (x) NM NM 29.8 52.5 42.9
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 19
Company Guide
MSM Malaysia Holdings
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 546 664 553 634 633
Cost of Goods Sold (445) (545) (450) (548) (556)
Gross ProfitGross ProfitGross ProfitGross Profit 101101101101 119119119119 104104104104 85.985.985.985.9 76.876.876.876.8 Other Oper. (Exp)/Inc (14.7) (22.1) (41.3) (51.3) (42.8)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 86.886.886.886.8 97.197.197.197.1 62.362.362.362.3 34.634.634.634.6 34.034.034.034.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (2.3) 0.10 (1.7) (3.6) (1.3)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 84.584.584.584.5 97.297.297.297.2 60.660.660.660.6 31.131.131.131.1 32.832.832.832.8 Tax (20.7) (30.5) (1.2) (7.4) (9.5)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 63.963.963.963.9 66.766.766.766.7 59.359.359.359.3 23.723.723.723.7 23.323.323.323.3 Net profit bef Except. 63.9 66.7 59.3 23.7 23.3
EBITDA 92.6 120 70.7 44.1 43.9
Growth
Revenue Gth (%) (7.1) 21.5 (16.7) 14.6 (0.1)
EBITDA Gth (%) (15.6) 29.3 (40.9) (37.7) (0.5)
Opg Profit Gth (%) (17.2) 11.9 (35.9) (44.4) (1.7)
Net Profit Gth (Pre-ex) (%) (19.3) 4.5 (11.1) (60.1) (1.6)
Margins
Gross Margins (%) 18.6 18.0 18.7 13.6 12.1
Opg Profit Margins (%) 15.9 14.6 11.3 5.5 5.4
Net Profit Margins (%) 11.7 10.0 10.7 3.7 3.7 Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 474 671 918 1,173 1,100
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 691 771 811 808 804
Cash & ST Invts 470 124 234 213 263
Inventory 674 730 794 804 1,101
Debtors 206 426 217 219 294
Other Current Assets 3.07 0.60 0.60 0.60 0.60
Total AssetsTotal AssetsTotal AssetsTotal Assets 2,5182,5182,5182,518 2,7232,7232,7232,723 2,9752,9752,9752,975 3,2183,2183,2183,218 3,5633,5633,5633,563
ST Debt
248 420 420 420 420
Creditor 242 183 285 289 396
Other Current Liab 6.15 1.98 1.98 1.98 1.98
LT Debt 0.0 0.0 200 400 600
Other LT Liabilities 76.7 75.4 75.4 75.4 75.4
Shareholder’s Equity 1,945 2,042 1,992 2,031 2,070
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 2,5182,5182,5182,518 2,7232,7232,7232,723 2,9752,9752,9752,975 3,2183,2183,2183,218 3,5633,5633,5633,563
Non-Cash Wkg. Capital 635 971 724 733 998
Net Cash/(Debt) 222 (296) (385) (607) (757)
Debtors Turn (avg days) 32.4 50.0 48.8 32.9 28.8
Creditors Turn (avg days) 45.8 43.7 42.9 52.8 45.3
Inventory Turn (avg days) 128.6 144.2 139.6 146.9 126.0
Asset Turnover (x) 1.0 0.9 0.8 0.8 1.0
Current Ratio (x) 2.7 2.1 1.8 1.7 2.0
Quick Ratio (x) 1.4 0.9 0.6 0.6 0.7
Net Debt/Equity (X) CASH 0.1 0.2 0.3 0.4
Net Debt/Equity ex MI (X) CASH 0.1 0.2 0.3 0.4
Capex to Debt (%) 33.1 55.6 60.4 45.7 4.9
Z-Score (X) 6.0 5.3 3.9 3.4 3.2
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 20
Company Guide
MSM Malaysia Holdings
Cash Flow Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 344 378 178 169 161
Dep. & Amort. 47.1 41.4 88.3 122 127
Tax Paid (86.3) (96.8) (45.7) (43.3) (41.4)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (66.8) (332) 247 (8.6) (265)
Other Operating CF 1.58 (81.5) 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 240240240240 (91.0)(91.0)(91.0)(91.0) 468468468468 239239239239 (17.9)(17.9)(17.9)(17.9) Capital Exp.(net) (82.2) (233) (374) (374) (50.0)
Other Invts.(net) 2.29 1.66 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 0.0 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (79.9)(79.9)(79.9)(79.9) (232)(232)(232)(232) (374)(374)(374)(374) (374)(374)(374)(374) (50.0)(50.0)(50.0)(50.0) Div Paid (169) (183) (183) (86.3) (81.7)
Chg in Gross Debt 219 171 200 200 200
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (8.0) (11.2) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 42.742.742.742.7 (23.3)(23.3)(23.3)(23.3) 17.217.217.217.2 114114114114 118118118118
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 203 (346) 110 (21.7) 50.4
Opg CFPS (sen) 43.6 34.2 31.4 35.2 35.1
Free CFPS (sen) 22.5 (46.2) 13.2 (19.3) (9.7)
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 24 Feb 16 4.70 5.25 HOLD
2: 20 May 16 5.02 5.25 HOLD
3: 05 Aug 16 5.08 5.25 HOLD
4: 24 Aug 16 5.03 4.60 HOLD
5: 22 Nov 16 4.90 3.00 FULLY VALUED
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
5
4.32
4.52
4.72
4.92
5.12
5.32
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM1.86 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM2.15 (16% upside) (Prev RM2.15) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger than expected FMCG sales
Where we differWhere we differWhere we differWhere we differ:::: In line with consensus Analyst King Yoong CHEAH +60 32604 3908 cheahky@alliancedbs.com
What’s New • On track to meet our full year earnings forecast
• 3sen special dividend per share is a possibility
• Recent price weakness is a buying opportunity
• Maintain BUY with RM2.15 TP
Price Relative
Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Revenue 398 393 424 456 EBITDA 83.9 87.3 93.2 99.6 Pre-tax Profit 64.2 67.9 77.8 84.9 Net Profit 47.5 52.0 59.1 64.5 Net Pft (Pre Ex.) 48.6 55.0 59.1 64.5 Net Pft Gth (Pre-ex) (%) (0.2) 13.1 7.5 9.2 EPS (sen) 10.6 11.5 12.8 13.9 EPS Pre Ex. (sen) 10.9 12.2 12.8 13.9 EPS Gth Pre Ex (%) 1 12 5 9 Diluted EPS (sen) 10.9 12.2 12.8 13.9 Net DPS (sen) 6.00 9.00 6.00 7.00 BV Per Share (sen) 74.4 80.2 84.9 91.9 PE (X) 17.5 16.2 14.6 13.4 PE Pre Ex. (X) 17.1 15.3 14.6 13.4 P/Cash Flow (X) 13.7 13.6 12.1 11.3 EV/EBITDA (X) 8.3 7.8 7.2 6.4 Net Div Yield (%) 3.2 4.8 3.2 3.8 P/Book Value (X) 2.5 2.3 2.2 2.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 14.3 15.0 15.7 15.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 1 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: N/A 12.7 14.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 5 S: 0 H: 1
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Expect Expect Expect Expect better servingsbetter servingsbetter servingsbetter servings aheadaheadaheadahead Remain positiveRemain positiveRemain positiveRemain positive.... We maintain our positive stance on OldTown Berhad (Oldtown) given that (1) we expect stronger results ahead and the group is on track meet our full year earnings forecasts, (2) valuation remains attractive particularly with the recent sell down, and, (3) we maintain that there is now higher chance of a special dividend of 3sen/share in view of its increasing cash pile and management’s commitment to reward shareholders. As such, we believe that the recent price weakness serves as good buying opportunities. OOOOptimistic of sptimistic of sptimistic of sptimistic of strongtrongtrongtrongerererer 2HFY17 results2HFY17 results2HFY17 results2HFY17 results.... Oldtown reported 2QFY17 core net profit of RM12.7m (-3% y-o-y, -9% q-o-q), despite stronger revenue of RM99.5m on a y-o-y comparison. This brings 1HFY17 earnings to RM26.5m (+16.2% y-o-y), accounting for 45% of our/consensus full-year earnings. We are optimistic that the group will register stronger 2HFY17 results, supported by (1) continued strong performance from its FMCG business, and (2) pick up in its F&B operations. Higher probability of 3Higher probability of 3Higher probability of 3Higher probability of 3----sen special dividend .sen special dividend .sen special dividend .sen special dividend .We believe that there is a high chance of a special dividend of 3 sen/share, which is similar to the 3sen/share dividend the group declared in FY16, in view of (1) its increasing cash pile (37sen net cash/share as at 30 Sept 2016), (2) M&A may not crystallise in FY17, and (3) management has indicated that it intends to continue rewarding shareholders. A potential special dividend of 3 sen per share could raise its yield to about 5%. Valuation:
We are maintaining our BUY recommendation with a TP of
RM2.15. Our TP is pegged to an unchanged PE of 16x.
Stripping out net cash, our target price implies a forward PE
(ex-cash) valuation of 13x.
Key Risks to Our View:
Weaker-than-expected consumer spending could be a drag on
its F&B business. At A Glance Issued Capital (m shrs) 451
Mkt. Cap (RMm/US$m) 840 / 190
Major Shareholders (%)
Old Town International 42.6
Mawer Global Fund 10.0
JP Morgan Chase 3.7
Free Float (%) 46.1
3m Avg. Daily Val (US$m) 0.28
ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Beverages
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
OldTown Berhad Version 8 | Bloomberg: OTB MK | Reuters: OLDT.KL Refer to important disclosures at the end of this report
68
88
108
128
148
168
188
208
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
OldTown Berhad (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 22
Company Guide
OldTown Berhad
WHAT’S NEW
Still positive
The coffee still tastes goodThe coffee still tastes goodThe coffee still tastes goodThe coffee still tastes good: We maintain our positive stance
on Oldtown post its analyst briefing, given that (1) despite
uninspiring 2QFY17 results, we believe the group is poised to
register stronger earnings ahead and on track to meet our full
year earnings target, (2) valuation remains attractive
particularly with the recent selldown, and (3) we believe that
there exists higher chance of special dividend of 3sen/share in
view of its increasing cash pile and management’s
commitment to reward shareholders.
2Q results 2Q results 2Q results 2Q results slightly weakerslightly weakerslightly weakerslightly weaker.... To recap, Oldtown reported a
2QFY17 net profit of RM12.7m (-3% y-o-y, -9% q-o-q),
despite stronger revenue of RM99.5m on a y-o-y comparison.
The main variation between our projection and the group’s
reported earnings were (1) higher effective tax rate of 27.4%
versus our estimate of 24%, and (2) lower than expected
contributions from its F&B operations.
F&B F&B F&B F&B –––– better quarters ahead.better quarters ahead.better quarters ahead.better quarters ahead. 2QFY17 pretax from its F&B
business dropped 16% y-o-y despite 4% higher topline of
RM48.8m, dragged by higher operating expenses. We
understand that the its F&B operations incurred RM0.5m
outlet closure expenses as the group ceased operations of 5
outlets during the quarter, which is unlikely to recur going
forward. Given its business has traditionally registered
stronger earnings and management is re-engineering its
menu to pass on some of the increase in costs to the
customer, we are comfortable that its F&B operations is on
track to meet our FY17 pretax forecast of RM20.5m (1H:
RM8.9m)
Coffee dose Coffee dose Coffee dose Coffee dose will be stronger in the coming quarterwill be stronger in the coming quarterwill be stronger in the coming quarterwill be stronger in the coming quarter.... Its FMCG
business continues to shine, delivering 2QFY17 pretax of
RM12.1m (+15.2% y-o-y) on the back of stronger revenue
(+11% y-o-y). We understand that higher revenue from its
FMCG segment was due to stronger export sales driven by
>200% y-o-y growth in its China sales. We believe that the
group will record stronger earnings growth in 2HFY17 driven
by the following: (1) 3QFY16, a seasonally strong quarter for
the group, (2) we gather that the group has recognised a
significant portion of its advertising & promotions (A&P)
expenses in 2Q (normally the group expenses most of it in the
3Q), and (3) strong China sales on Double 11 (Singles' Day)
that fell on the 11 Nov (>RM3m sales in one day).
Margin pressureMargin pressureMargin pressureMargin pressure---- mitigated in the near term. mitigated in the near term. mitigated in the near term. mitigated in the near term. One concern
for its FMCG operations will be the potential higher cost of
raw materials, which we believe is largely mitigated in the
near term as the group has locked in contract prices for its
coffee powder over the next seven months. There will be an
uptick in its non dairy creamer cost in November, which
constitutes about 40% its cost of goods sold, but
management will seek to mitigate it through improvement in
cost efficiency. On the other hand, the higher export sales has
enabled the group to benefit from Ringgit weakness against
USD and RMB.
Exclusion from Shariah compliance list. Exclusion from Shariah compliance list. Exclusion from Shariah compliance list. Exclusion from Shariah compliance list. The stock was recently
dropped from shariah compliance due to non-compliance of
its financial ratio. Although management has resolved the
issues by transferring some cash to the shariah compliance
deposit account, we believe that it will take about 6 months
to a year for the group to be reinstated onto the list as the
review is based on its annual audited accounts.
Higher chance of 3sen special dividend/share.Higher chance of 3sen special dividend/share.Higher chance of 3sen special dividend/share.Higher chance of 3sen special dividend/share. As we
understand that probability of M&A may not crystalise this
financial year as the group has not identified an attractive
M&A target, we believe that there exists higher chance of
special dividend of 3sen/share in view of its increasing cash
pile and management’s commitment to reward shareholders.
At present, we have estimated 6sen DPS for the group, which
represents 3% yield. A potential special dividend of 3sen per
share could raise its yield to about 5%.
ASIAN INSIGHTS VICKERS SECURITIES
Page 23
Company Guide
OldTown Berhad
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
FMCG sales to be its key earnings driver.FMCG sales to be its key earnings driver.FMCG sales to be its key earnings driver.FMCG sales to be its key earnings driver. FMCG revenue grew
by 10.5% y-o-y in FY16. Management is targeting double-digit
growth in FY17 while we have assumed FMCG sales to grow by
12% in FY17. We estimate that sales to China only represents
<6% of its FMCG sales in FY16, a far cry from its peak of
>10%. As such, we are positive that there is plenty of room for
the group to boost export sales with the completion of the
restructuring of its China distributorship in late 2015.
Room to utilise its production capacity.Room to utilise its production capacity.Room to utilise its production capacity.Room to utilise its production capacity. The manufacturing
plant in Tasek Industrial Estate, Ipoh, has an annual designed
production capacity of 24k kg for instant coffee mix and instant
tea mix, with only <50% utilised so far. This provides room to
accommodate rising demand without further capacity
expansion.
F&B F&B F&B F&B –––– chalchalchalchallenging operating environment.lenging operating environment.lenging operating environment.lenging operating environment. On the other hand,
we believe that the growth prospects of its F&B business
remains challenging. The group operated 238 café outlets in
Sept 2016, with 204 (86%) based in Malaysia.
F&B F&B F&B F&B –––– potential M&A?potential M&A?potential M&A?potential M&A? As at 30 Sept 2016, the group had net
cash of RM174m, and management may undertake M&As in
the F&B space to enhance future growth. Although we
understand that there is no attractive M&A target in sight at
present, we will not be surprised if the group announces an
acquisition before the end of this financial year. Given that
Oldtown is likely to finance its acquisition with internal funds
and the current challenging operating environment favours
industry consolidation, we are positive that any potential M&A
exercise will be earnings accretive for the group.
Avg revenue/ self&partly owned outlet (RM k/yr)
Number of total outlets
FMCG sales volume (k kg)
FMCG ASP (RM)
Source: Company, AllianceDBS
1054 10731035
10871141
0.0
164.6
329.2
493.9
658.5
823.1
987.7
1152.3
2014A 2015A 2016A 2017F 2018F
238 245 244 249 254
0.0
51.8
103.6
155.4
207.3
259.1
2014A 2015A 2016A 2017F 2018F
9565 965110056
11413
12783
0.00
2607.73
5215.46
7823.19
10430.93
13038.66
2014A 2015A 2016A 2017F 2018F
18.3 18.719.8 19.8 19.8
0.0
4.0
8.0
12.0
16.0
20.0
2014A 2015A 2016A 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 24
Company Guide
OldTown Berhad
Balance Sheet:
Strong balance sheet Strong balance sheet Strong balance sheet Strong balance sheet –––– net cash position.net cash position.net cash position.net cash position. As at 30 Sept 2016,
Oldtown had a net cash position of RM174m, which allows the
group to (1) sustain its dividend policy at a minimum 50%
payout, (2) continue its share buyback scheme, and (3)
undertake attractive M&A activities to expand its operations.
Share Price Drivers:
Profitability and prospects Profitability and prospects Profitability and prospects Profitability and prospects –––– keys keys keys keys share price drivers.share price drivers.share price drivers.share price drivers. We are
positive that there is plenty of room for the group to boost its
export sales with the completion of the restructuring of its
China distributorship in late 2015. On the other hand, we
believe its F&B operations are still facing challenges, although
the earnings contribution to the group has declined over the
years (25%-30% of group earnings).
Key Risks:
Increasing competition in F&B segment.Increasing competition in F&B segment.Increasing competition in F&B segment.Increasing competition in F&B segment. Oldtown’s cafe chain
has been challenged by small specialty cafe chains in the local
market since 2013. If the group fails to transform and adapt to
rapidly changing consumer demand, the decline in F&B
contributions will drag its overall earnings.
Failure to pass on higher costs to consumers.Failure to pass on higher costs to consumers.Failure to pass on higher costs to consumers.Failure to pass on higher costs to consumers. Given that raw
material costs make up over 30% of Oldtown’s total operating
cost, an unexpected swing in food commodity prices, e.g. due
to changes in climate and government regulations, could result
in a spike in the prices of key raw materials such as sugar,
coffee beans, and flour.
Company Background
Oldtown is a regional cafe chain operator (F&B) and an
established beverage manufacturer (FMCG) based in Malaysia.
As at FY16, the group derived 45% of its revenue from F&B
and 55% from FMCG.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
0.8
0.8
0.8
0.9
0.9
0.9
0.9
0.9
1.0
1.0
1.0
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
2014A 2015A 2016A 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2014A 2015A 2016A 2017F 2018F
Avg: 15.7x
+1sd: 18.9x
+2sd: 22.1x
-1sd: 12.5x
-2sd: 9.3x8.3
10.3
12.3
14.3
16.3
18.3
20.3
22.3
24.3
26.3
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 2.34x
+1sd: 2.7x
+2sd: 3.05x
-1sd: 1.99x
-2sd: 1.64x
1.4
1.9
2.4
2.9
3.4
Apr-13 Apr-14 Apr-15 Apr-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 25
Company Guide
OldTown Berhad
Key Assumptions
FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Avg revenue/ self&partly owned outlet (RM k/yr)
1,054 1,073 1,035 1,087 1,141
Number of total outlets 238 245 244 249 254
FMCG sales volume (k kg) 9,565 9,651 10,056 11,413 12,783
FMCG ASP (RM) 18.3 18.7 19.8 19.8 19.8
Income Statement (RMm)
FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 382 398 393 424 456
Cost of Goods Sold (248) (256) (247) (268) (291)
Gross ProfitGross ProfitGross ProfitGross Profit 134134134134 141141141141 146146146146 156156156156 166166166166 Other Opng (Exp)/Inc (67.7) (76.2) (75.6) (78.2) (81.1)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 66.566.566.566.5 65.265.265.265.2 70.670.670.670.6 77.577.577.577.5 84.484.484.484.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (0.2) (0.2) 0.0 0.0 0.0
Net Interest (Exp)/Inc (0.1) 0.31 0.28 0.28 0.52
Exceptional Gain/(Loss) 0.19 (1.1) (3.0) 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 66.466.466.466.4 64.264.264.264.2 67.967.967.967.9 77.877.877.877.8 84.984.984.984.9 Tax (16.0) (15.1) (15.9) (18.7) (20.4)
Minority Interest (1.4) (1.6) 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 48.948.948.948.9 47.547.547.547.5 52.052.052.052.0 59.159.159.159.1 64.564.564.564.5 Net Profit before Except. 48.8 48.6 55.0 59.1 64.5
EBITDA 85.9 83.9 87.3 93.2 99.6
Growth
Revenue Gth (%) 10.9 4.1 (1.1) 7.7 7.7
EBITDA Gth (%) 12.1 (2.4) 4.1 6.8 6.9
Opg Profit Gth (%) 11.5 (1.9) 8.3 9.8 8.9
Net Profit Gth (Pre-ex) (%) 7.2 (0.2) 13.1 7.5 9.2
Margins & Ratio
Gross Margins (%) 35.1 35.5 37.2 36.7 36.3
Opg Profit Margin (%) 17.4 16.4 17.9 18.3 18.5
Net Profit Margin (%) 12.8 11.9 13.2 13.9 14.1
ROAE (%) 15.4 14.3 15.0 15.7 15.8
ROA (%) 12.1 11.0 11.7 12.6 12.8
ROCE (%) 14.0 13.4 14.2 14.5 14.6
Div Payout Ratio (%) 55.6 56.5 78.2 47.0 50.2
Net Interest Cover (x) 621.0 NM NM NM NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 26
Company Guide
OldTown Berhad
Quarterly / Interim Income Statement (RMm)
FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017 Revenue 92.6 102 105 103 99.6
Cost of Goods Sold (59.2) (60.4) (65.9) (65.3) (65.3)
Gross ProfitGross ProfitGross ProfitGross Profit 33.533.533.533.5 41.841.841.841.8 38.638.638.638.6 37.637.637.637.6 34.234.234.234.2 Other Oper. (Exp)/Inc (17.0) (24.6) (15.0) (17.8) (18.0)
Operating Operating Operating Operating ProfitProfitProfitProfit 16.516.516.516.5 17.217.217.217.2 23.623.623.623.6 19.819.819.819.8 16.216.216.216.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.02 0.10 0.02 0.0 0.0
Net Interest (Exp)/Inc 0.10 0.10 0.0 0.04 0.05
Exceptional Gain/(Loss) 0.0 0.0 (3.0) 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 16.616.616.616.6 17.417.417.417.4 20.620.620.620.6 19.819.819.819.8 16.316.316.316.3 Tax (3.5) (6.2) (2.2) (6.1) (3.8)
Minority Interest (0.1) (0.1) (0.1) 0.18 0.20
Net ProfitNet ProfitNet ProfitNet Profit 13.113.113.113.1 11.111.111.111.1 18.318.318.318.3 13.913.913.913.9 12.712.712.712.7 Net profit bef Except. 13.1 11.1 21.3 13.9 12.7
EBITDA 20.6 21.5 28.3 24.1 20.6
Growth
Revenue Gth (%) (1.5) 10.3 2.3 (1.5) (3.2)
EBITDA Gth (%) 20.1 4.2 31.7 (15.0) (14.4)
Opg Profit Gth (%) 22.2 4.2 37.1 (16.1) (18.1)
Net Profit Gth (Pre-ex) (%) 39.1 (15.0) 92.2 (34.8) (8.9)
Margins
Gross Margins (%) 36.1 40.9 36.9 36.5 34.4
Opg Profit Margins (%) 17.8 16.8 22.6 19.2 16.3
Net Profit Margins (%) 14.1 10.9 17.5 13.5 12.7 Balance Sheet (RMm)
FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 123 125 126 122 120
Invts in Associates & JVs 1.51 1.50 1.40 1.40 1.40
Other LT Assets 59.2 52.5 47.2 45.6 43.1
Cash & ST Invts 166 162 180 214 250
Inventory 22.5 30.1 25.5 27.7 30.0
Debtors 45.9 61.0 63.0 67.9 73.1
Other Current Assets 5.62 4.70 7.50 7.50 7.50
Total AssetsTotal AssetsTotal AssetsTotal Assets 424424424424 436436436436 450450450450 487487487487 525525525525
ST Debt
10.0 9.80 9.80 9.80 9.80
Creditor 49.9 63.4 56.3 61.1 66.2
Other Current Liab 1.83 2.60 2.20 2.20 2.20
LT Debt 20.4 15.7 12.1 12.1 12.1
Other LT Liabilities 7.78 8.00 7.10 8.12 8.70
Shareholder’s Equity 329 333 362 393 426
Minority Interests 5.04 3.80 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 424424424424 436436436436 450450450450 487487487487 525525525525
Non-Cash Wkg. Capital 22.2 29.8 37.5 39.8 42.1
Net Cash/(Debt) 136 137 158 192 228
Debtors Turn (avg days) 45.9 49.1 57.5 56.4 56.4
Creditors Turn (avg days) 70.8 87.1 94.8 84.9 84.3
Inventory Turn (avg days) 29.0 40.4 44.0 38.4 38.2
Asset Turnover (x) 0.9 0.9 0.9 0.9 0.9
Current Ratio (x) 3.9 3.4 4.0 4.3 4.6
Quick Ratio (x) 3.4 2.9 3.6 3.9 4.1
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 57.0 44.7 48.4 45.7 45.7
Z-Score (X) 7.7 7.1 8.0 8.0 7.7
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 27
Company Guide
OldTown Berhad
Cash Flow Statement (RMm)
FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 66.4 64.2 67.9 77.8 84.9
Dep. & Amort. 19.6 18.9 16.7 15.7 15.2
Tax Paid (15.7) (11.5) (15.7) (18.7) (20.4)
Assoc. & JV Inc/(loss) 0.16 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (2.8) (12.6) (14.5) (2.3) (2.4)
Other Operating CF (1.6) 1.64 7.32 (1.2) (1.4)
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 66.166.166.166.1 60.660.660.660.6 61.761.761.761.7 71.471.471.471.4 76.076.076.076.0 Capital Exp.(net) (17.3) (11.4) (10.6) (10.0) (10.0)
Other Invts.(net) 4.20 (67.9) (15.0) 0.0 0.0
Invts in Assoc. & JV (18.3) 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 3.34 62.9 32.1 1.19 2.00
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (28.1)(28.1)(28.1)(28.1) (16.4)(16.4)(16.4)(16.4) 6.506.506.506.50 (8.8)(8.8)(8.8)(8.8) (8.0)(8.0)(8.0)(8.0) Div Paid (10.9) (27.0) (26.8) (27.8) (32.4)
Chg in Gross Debt (11.6) (5.4) (4.5) 0.0 0.0
Capital Issues (1.5) (19.7) (0.4) 0.0 0.0
Other Financing CF 0.07 (4.8) (0.3) 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (23.9)(23.9)(23.9)(23.9) (56.9)(56.9)(56.9)(56.9) (32.0)(32.0)(32.0)(32.0) (27.8)(27.8)(27.8)(27.8) (32.4)(32.4)(32.4)(32.4)
Currency Adjustments (0.3) (5.3) (1.8) 0.0 0.0
Chg in Cash 13.7 (18.0) 34.4 34.8 35.5
Opg CFPS (sen) 15.2 16.3 16.9 15.9 16.9
Free CFPS (sen) 10.7 11.0 11.3 13.2 14.2
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: King Yoong CHEAH
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 26 Feb 16 1.50 1.60 BUY
2: 29 Feb 16 1.48 1.70 BUY
3: 03 Mar 16 1.56 1.70 BUY
4: 24 Mar 16 1.48 1.70 BUY
5: 23 May 16 1.40 1.70 BUY
6: 25 May 16 1.42 1.70 BUY
7: 27 May 16 1.66 1.70 BUY
8: 30 May 16 1.69 2.10 BUY
9: 26 Aug 16 1.87 2.10 BUY
10: 29 Aug 16 1.85 2.15 BUY
11: 04 Oct 16 2.00 2.15 BUY
12: 25 Nov 16 1.87 2.15 BUY
13: 28 Nov 16 1.91 2.15 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
56
7
8
9
1011 12
13
1.28
1.38
1.48
1.58
1.68
1.78
1.88
1.98
2.08
2.18
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC, PY
HOLDHOLDHOLDHOLD (Downgrade from Buy)
Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM2.66 (JCIJCIJCIJCI : : : : 5,308.13) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM2.95 (11% upside) (Prev RM2.95) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger than exepected SSSG
Where we differWhere we differWhere we differWhere we differ:::: In line with consensus Analyst King Yoong CHEAH +60 32604 3908 cheahky@alliancedbs.com
What’s New • 1QFY17 earnings below expectations, dragged by
sharp decline in margins
• Margins could continue to be under pressure due
to weak Ringgit
• Downgrade to HOLD with RM2.95 TP
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Revenue 978 1,301 1,412 1,476 EBITDA 142 221 240 236 Pre-tax Profit 112 187 211 211 Net Profit 80.2 137 156 156 Net Pft (Pre Ex.) 80.2 137 156 156 Net Pft Gth (Pre-ex) (%) (11.8) 71.4 13.4 0.3 EPS (sen) 12.2 20.9 23.7 23.8 EPS Pre Ex. (sen) 12.2 20.9 23.7 23.8 EPS Gth Pre Ex (%) (12) 71 13 0 Diluted EPS (sen) 12.2 20.9 23.7 23.8 Net DPS (sen) 10.0 11.5 10.0 10.0 BV Per Share (sen) 61.6 68.4 82.1 95.8 PE (X) 21.8 12.7 11.2 11.2 PE Pre Ex. (X) 21.8 12.7 11.2 11.2 P/Cash Flow (X) 9.1 19.8 10.9 10.1 EV/EBITDA (X) 10.9 7.1 6.2 5.9 Net Div Yield (%) 3.8 4.3 3.8 3.8 P/Book Value (X) 4.3 3.9 3.2 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.2 32.1 31.5 26.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: N/A 23.3 25.5 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 7 S: 0 H: 4
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Not everything fits wellNot everything fits wellNot everything fits wellNot everything fits well Getting pricey now. Getting pricey now. Getting pricey now. Getting pricey now. We downgrade our recommendation for Padini Holdings (Padini) to HOLD. We are taking a more cautious stance on the stock as we view that the group’s stellar share price performance and its current valuation have priced in its near term growth prospects. Furthermore, its profit margin may continue to be under pressure due to the weak Ringgit. As such, we view the stock to be fairly valued at this juncture. Not a fashionable quarterNot a fashionable quarterNot a fashionable quarterNot a fashionable quarter. Despite strong topline growth (+15% y-o-y), the group reported unexciting 1QFY17 earnings of RM28m (-10.1% y-o-y), only meeting 19% of our/consensus full year forecasts. The uninspiring results were mainly dragged by lower than expected gross profit margin due to (1) sales promotions, and, (2) more expensive merchandise brought in. We are maintaining our earnings forecasts for now, pending our upcoming meeting with management. GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to weak weak weak weak RinggitRinggitRinggitRinggit.... The group sources about 70% of its products from China, denominated in RMB, and the remainder mainly in USD. As such, the ringgit’s persistent weakness against both currencies could continue to increase its inventory cost and put downward pressure on its margins in the coming quarters. Valuation:
The stock has performed remarkably well, with its share price
rising >100% since our upgrade in August 2015. In view of its
strong share price performance and downside risk to its
margins, we believe the group’s current valuation has priced in
its near term growth prospects. We downgrade our
recommendation to HOLD with an unchanged RM2.95 TP
pegged to 12x forward PE.
Key Risks to Our View:
Weaker-than-expected consumer spending and increasingly
competitive industry landscape. At A Glance Issued Capital (m shrs) 658
Mkt. Cap (RMm/US$m) 1,750 / 396
Major Shareholders (%)
Yong Pang Chaun Holdings Sdn Bhd 43.7
Skim Amanah Saham Bumiputera 5.0
iCapital.biz 3.5
Free Float (%) 50.1
3m Avg. Daily Val (US$m) 0.49
ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Personal Goods
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
Padini Holdings Version 7 | Bloomberg: PAD MK | Reuters: PDNI.KL Refer to important disclosures at the end of this report
51
71
91
111
131
151
171
191
211
1.2
1.7
2.2
2.7
3.2
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Padini Holdings (LHS) Relative JCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 29
Company Guide
Padini Holdings
WHAT’S NEW
Not a fashionable quarter
Below expectationBelow expectationBelow expectationBelow expectationssss.... Despite strong topline growth (+15% y-
o-y), the group reported unexciting 1QFY17 earnings of
RM28m (-10.1% y-o-y), only meeting 19% of our/consensus
full year forecasts. The uninspiring results were mainly
dragged by lower than expected gross profit margin. We
believe that the q-o-q review does not serve as a good
comparison as Padini’s previous quarter was boosted by pre-
Raya festive sales.
ToplineToplineToplineTopline---- still still still still strong..strong..strong..strong...... The strong revenue growth y-o-y was
mainly driven by (1) strong sales growth in existing stores
supported by its mix & match bundling and one piece
promotional strategies, and (2) additional 5 Padini Concept
Store outlets and 9 Brands Outlet stores in operation
compared with 1QFY16.
….but G….but G….but G….but GP margin weakened significantly.P margin weakened significantly.P margin weakened significantly.P margin weakened significantly. Nonetheless, gross
profit (GP) margin fell from 46% in 1QFY16 to 41% in
1QFY17, mainly dragged by (1) sales promotions, and (2)
more expensive merchandise brought in.
GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to GP margin could continue to come under pressure due to
persistent Ringgit weakness. persistent Ringgit weakness. persistent Ringgit weakness. persistent Ringgit weakness. The group sources about 70%
of its products from China, which are denominated in RMB,
and the remainder mainly in USD. As such, the ringgit’s
persistent weakness against both currencies may continue to
increase its inventory cost and put downward pressure on its
margin in the coming quarters.
Dividend payout inDividend payout inDividend payout inDividend payout in lllline.ine.ine.ine. The group declared a second
dividend per share of 2.5sen for 1QFY17, which is within our
10sen DPS forecast for FY17.
We are maintaining our earnings forecasts for now, pending
our upcoming meeting with management.
Downgrade to HOLD with RM2.95 TP.Downgrade to HOLD with RM2.95 TP.Downgrade to HOLD with RM2.95 TP.Downgrade to HOLD with RM2.95 TP. The stock has
performed remarkably well, with its share price rising >100%
since our upgrade in August 2015. We believe that the
group’s current valuation has priced in its near term growth
prospects, we downgrade our recommendation to HOLD with
an unchanged RM2.95 TP pegged to 12x forward PE.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Revenue 270 349 310 15.0 (11.1)
Cost of Goods Sold (145) (209) (182) 25.2 (13.2)
Gross ProfitGross ProfitGross ProfitGross Profit 125125125125 140140140140 129129129129 3.23.23.23.2 (7.9)(7.9)(7.9)(7.9)
Other Oper. (Exp)/Inc (80.5) (88.6) (89.0) 10.5 0.5
Operating ProfitOperating ProfitOperating ProfitOperating Profit 44.244.244.244.2 51.151.151.151.1 39.639.639.639.6 (10.3)(10.3)(10.3)(10.3) (22.5)(22.5)(22.5)(22.5)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 0.0 0.0 0.0 nm nm
Net Interest (Exp)/Inc 0.21 0.50 0.0 nm nm
Exceptional Gain/(Loss) (0.1) 0.0 0.0 nm nm
PrePrePrePre----tax Profittax Profittax Profittax Profit 44.344.344.344.3 51.651.651.651.6 39.639.639.639.6 (10.6)(10.6)(10.6)(10.6) (23.3)(23.3)(23.3)(23.3)
Tax (12.5) (14.2) (11.0) (11.8) (22.5)
Minority Interest 0.0 0.0 0.0 nm nm
Net ProfitNet ProfitNet ProfitNet Profit 31.831.831.831.8 37.437.437.437.4 28.628.628.628.6 (10.1)(10.1)(10.1)(10.1) (23.5)(23.5)(23.5)(23.5)
Net profit bef Except. 31.9 37.4 28.6 (10.3) (23.5)
EBITDA 52.2 60.6 48.7 (6.6) (19.6)
Margins (%)
Gross Margins 46.2 40.0 41.5
Opg Profit Margins 16.4 14.6 12.8
Net Profit Margins 11.8 10.7 9.2
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 30
Company Guide
Padini Holdings
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
SSSG and number of new outlets are key revenue drivers. SSSG and number of new outlets are key revenue drivers. SSSG and number of new outlets are key revenue drivers. SSSG and number of new outlets are key revenue drivers. Like
other fashion retailers, same store sales growth (SSSG) and the
number of outlets opened by the group in the financial year is a
key revenue driver for the group. After a strong performance in
FY16, we estimate SSSG for FY17 to be about 1%, dragged by
waning popularity of its popular mix-and-match bundling
strategy for Padini Concept Stores (PCS). We believe that the
group’s topline will continue to be sustained by full
contributions from 13 stores opened in FY16 and the opening
of another 15 stores slated for FY17.
Brand Outlet could benefit from downtrading. Brand Outlet could benefit from downtrading. Brand Outlet could benefit from downtrading. Brand Outlet could benefit from downtrading. We observe that
consumers are increasingly looking for value in the competitive
apparel market. This bodes well for the group’s rising star,
Brands Outlet’s expansion over the next 2-3 years.
Huge untapped market in suburban cities.Huge untapped market in suburban cities.Huge untapped market in suburban cities.Huge untapped market in suburban cities. The group will focus
on the Brands Outlet (BO) chain over the next three years, to
improve business scale, distribution network, and operating
leverage, to strengthen its presence in the local apparel market.
Management sees business opportunities in the huge
underserved markets in Malaysia’s suburban cities, and tapping
these markets should keep it busy over the next few years. Once
BO hits saturation point, management will review its growth
strategy, including expanding its product lines and overseas
business.
Margin compression remains a key concern. Margin compression remains a key concern. Margin compression remains a key concern. Margin compression remains a key concern. We are concerned
that the popularity of its mix-and-match bundling strategy
implemented in PCS will eventually taper off, which could drag
down its SSSG, given the slower-than-expected recovery in
domestic consumer spending. Furthermore, the group sources
about 65-70% of its products from China, which are
denominated in RMB, and the remainder mainly in USD. Given
the ringgit's depreciation against both currencies, we expect the
group’s margins to continue to come under pressure.
Total retail floor space (k sq ft)
Revenue growth (%)
SSS growth (%)
Revenue growth from exports, consignment & others (%)
Revenue growth from new floor spaces (%)
Source: Company, AllianceDBS
848
965
11331233
1313
0.0
189.4
378.8
568.2
757.6
947.1
1136.5
1325.9
2014A 2015A 2016A 2017F 2018F
9.69
12.9
33
8.51
4.47
0.0
6.7
13.5
20.2
26.9
33.7
2014A 2015A 2016A 2017F 2018F
4.85
2.21
9.6
0.890.5
0.00
1.96
3.92
5.88
7.83
9.79
2014A 2015A 2016A 2017F 2018F
-2.22
0.34
1.34
-1.13
0.26
-2.4
-1.7
-0.9
-0.2
0.6
1.4
2014A 2015A 2016A 2017F 2018F
7.06
10.3
13.9
9.34
6.95
0.0
2.8
5.6
8.4
11.2
14.0
2014A 2015A 2016A 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 31
Company Guide
Padini Holdings
Balance Sheet:
Strong balance sheet Strong balance sheet Strong balance sheet Strong balance sheet –––– net cash position.net cash position.net cash position.net cash position. The group is in a net
cash position, which allows the group to (1) sustain its dividend
policy of at least 10 sen per share, and, (2) undertake outlet
expansion without stretching its balance sheet.
Share Price Drivers:
Stable margins Stable margins Stable margins Stable margins –––– key share price key share price key share price key share price driver. driver. driver. driver. Margins have been
dragged by (1) aggressive sales campaigns to drive sales and
maintain market leadership, (2) the group’s plans to absorb the
6% GST in the near term, and (3) more expensive imported
merchandise due to the weaker ringgit.
SustainSustainSustainSustaining high dividend payout.ing high dividend payout.ing high dividend payout.ing high dividend payout. Management is committed to
pay out a minimum DPS of 10 sen over the next few years, even
if earnings prospects remain sluggish, thanks to its (1) strong
cash-generating capability, and (2) net cash position.
Key Risks:
CompetitCompetitCompetitCompetitive sectorive sectorive sectorive sector. Padini continues to face strong
competition from a large pool of retail brands in Malaysia.
Prolonged slump in consumer sentiment.Prolonged slump in consumer sentiment.Prolonged slump in consumer sentiment.Prolonged slump in consumer sentiment. Although the group
has so far benefited from downtrading, a prolonged slump in
consumer sentiment could dampen discretionary spending.
Company Background
Padini is a 43-year-old Malaysia-based fashion retailer offering
clothing, accessories and shoes under the brands of Padini,
Vincci, Seed, Miki, Padini Authentic, P&Co, PDI etc.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
1.6
1.7
1.7
1.8
1.8
1.9
1.9
2.0
2.0
2.1
2.1
0.00
0.05
0.10
0.15
0.20
0.25
2014A 2015A 2016A 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2014A 2015A 2016A 2017F 2018F
Avg: 11.3x
+1sd: 14.3x
+2sd: 17.3x
-1sd: 8.3x
-2sd: 5.3x4.7
6.7
8.7
10.7
12.7
14.7
16.7
18.7
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 3.06x
+1sd: 3.57x
+2sd: 4.09x
-1sd: 2.54x
-2sd: 2.03x
1.8
2.3
2.8
3.3
3.8
4.3
4.8
Dec-12 Dec-13 Dec-14 Dec-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 32
Company Guide
Padini Holdings
Key Assumptions
FY FY FY FY JunJunJunJun 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Total retail floor space (k sq ft) 848 965 1,133 1,233 1,313
Revenue growth (%) 9.69 12.9 33.0 8.51 4.47
SSS growth (%) 4.85 2.21 9.60 0.89 0.50 Revenue growth from exports, consignment & others (%)
(2.2) 0.34 1.34 (1.1) 0.26 Revenue growth from new floor spaces (%)
7.06 10.3 13.9 9.34 6.95 Income Statement (RMm)
FY FY FY FY JunJunJunJun 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 866 978 1,301 1,412 1,476
Cost of Goods Sold (466) (556) (759) (819) (857)
Gross ProfitGross ProfitGross ProfitGross Profit 400400400400 422422422422 543543543543 593593593593 620620620620 Other Opng (Exp)/Inc (276) (311) (356) (384) (413)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 124124124124 111111111111 187187187187 208208208208 207207207207
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 1.78 0.40 0.21 2.48 4.66
Exceptional Gain/(Loss) 0.0 0.0 (0.1) 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 126126126126 112112112112 187187187187 211211211211 211211211211 Tax (34.8) (31.6) (49.3) (54.8) (54.9)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 90.990.990.990.9 80.280.280.280.2 137137137137 156156156156 156156156156 Net Profit before Except. 90.9 80.2 137 156 156
EBITDA 148 142 221 240 236
Growth
Revenue Gth (%) 9.7 12.9 33.1 8.5 4.6
EBITDA Gth (%) 6.0 (3.7) 55.9 8.2 (1.4)
Opg Profit Gth (%) 5.8 (10.1) 67.4 11.6 (0.8)
Net Profit Gth (Pre-ex) (%) 6.1 (11.8) 71.4 13.4 0.3
Margins & Ratio
Gross Margins (%) 46.2 43.2 41.7 42.0 42.0
Opg Profit Margin (%) 14.3 11.4 14.3 14.7 14.0
Net Profit Margin (%) 10.5 8.2 10.6 11.0 10.6
ROAE (%) 23.5 20.2 32.1 31.5 26.7
ROA (%) 16.0 13.7 21.8 21.8 19.0
ROCE (%) 20.0 17.8 29.3 29.0 24.6
Div Payout Ratio (%) 83.2 82.0 55.1 42.2 42.1
Net Interest Cover (x) NM NM NM NM NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 33
Company Guide
Padini Holdings
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 270 340 342 349 310
Cost of Goods Sold (145) (204) (200) (209) (182)
Gross ProfitGross ProfitGross ProfitGross Profit 125125125125 136136136136 142142142142 140140140140 129129129129 Other Oper. (Exp)/Inc (80.5) (91.0) (96.0) (88.6) (89.0)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 44.244.244.244.2 44.944.944.944.9 46.446.446.446.4 51.151.151.151.1 39.639.639.639.6 Net Interest (Exp)/Inc 0.21 (0.4) (0.1) 0.50 0.0
Exceptional Gain/(Loss) (0.1) 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 44.344.344.344.3 44.544.544.544.5 46.346.346.346.3 51.651.651.651.6 39.639.639.639.6 Tax (12.5) (11.5) (11.1) (14.2) (11.0)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 31.831.831.831.8 33.133.133.133.1 35.135.135.135.1 37.437.437.437.4 28.628.628.628.6 Net profit bef Except. 31.9 33.1 35.1 37.4 28.6
EBITDA 52.2 53.5 55.2 60.6 48.7
Growth
Revenue Gth (%) 21.5 26.3 0.6 1.9 (11.1)
EBITDA Gth (%) 75.4 2.5 3.3 9.8 (19.6)
Opg Profit Gth (%) 101.6 1.8 3.2 10.2 (22.5)
Net Profit Gth (Pre-ex) (%) 74.4 3.7 6.2 6.5 (23.5)
Margins
Gross Margins (%) 46.2 39.9 41.6 40.0 41.5
Opg Profit Margins (%) 16.4 13.2 13.5 14.6 12.8
Net Profit Margins (%) 11.8 9.7 10.3 10.7 9.2
Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 109 123 135 130 121
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 10.8 12.5 11.6 10.9 10.2
Cash & ST Invts 171 246 209 282 374
Inventory 222 169 222 258 270
Debtors 55.2 50.6 77.1 89.9 94.0
Other Current Assets 0.95 1.40 1.40 1.40 1.40
Total AssetsTotal AssetsTotal AssetsTotal Assets 569569569569 603603603603 656656656656 772772772772 871871871871
ST Debt
37.2 26.5 15.0 15.0 15.0
Creditor 110 138 158 184 193
Other Current Liab 11.5 11.8 11.8 11.8 11.8
LT Debt 15.0 12.5 12.5 12.5 12.5
Other LT Liabilities 7.39 8.00 8.00 8.00 8.00
Shareholder’s Equity 388 406 450 540 631
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 569569569569 603603603603 656656656656 772772772772 871871871871
Non-Cash Wkg. Capital 157 70.7 130 153 161
Net Cash/(Debt) 119 207 181 254 347
Debtors Turn (avg days) 22.1 19.7 17.9 21.6 22.7
Creditors Turn (avg days) 82.1 86.4 74.8 79.3 83.2
Inventory Turn (avg days) 150.9 135.9 98.5 111.1 116.5
Asset Turnover (x) 1.6 1.7 2.1 2.0 1.8
Current Ratio (x) 2.8 2.6 2.7 3.0 3.4
Quick Ratio (x) 1.4 1.7 1.5 1.8 2.1
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 79.7 107.3 152.1 90.9 72.7
Z-Score (X) 9.8 9.3 9.8 9.1 8.8
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 34
Company Guide
Padini Holdings
Cash Flow Statement (RMm)
FY FY FY FY JunJunJunJun 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 126 112 162 211 211
Dep. & Amort. 23.6 30.6 30.7 31.3 29.5
Tax Paid (35.6) (33.4) (42.2) (54.8) (54.9)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (66.7) 75.1 (59.3) (23.3) (7.5)
Other Operating CF 4.96 7.71 (3.1) (3.6) (5.8)
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 52.052.052.052.0 192192192192 88.388.388.388.3 160160160160 173173173173 Capital Exp.(net) (41.6) (41.8) (41.8) (25.0) (20.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (57.3) (31.8) 3.11 3.58 5.76
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (98.9)(98.9)(98.9)(98.9) (73.6)(73.6)(73.6)(73.6) (38.7)(38.7)(38.7)(38.7) (21.4)(21.4)(21.4)(21.4) (14.2)(14.2)(14.2)(14.2) Div Paid (75.7) (65.8) (75.7) (65.8) (65.8)
Chg in Gross Debt 13.7 (16.0) (11.5) 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 0.0 0.0 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (62.0)(62.0)(62.0)(62.0) (81.8)(81.8)(81.8)(81.8) (87.2)(87.2)(87.2)(87.2) (65.8)(65.8)(65.8)(65.8) (65.8)(65.8)(65.8)(65.8)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash (109) 36.5 (37.6) 73.2 92.6
Opg CFPS (sen) 18.0 17.7 22.4 27.9 27.4
Free CFPS (sen) 1.57 22.8 7.07 20.6 23.2
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: King Yoong CHEAH
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 26 Jan 16 1.98 2.16 BUY
2: 24 Feb 16 2.12 2.16 HOLD
3: 19 Apr 16 2.07 2.25 BUY
4: 19 May 16 2.33 2.55 BUY
5: 19 Aug 16 2.87 2.60 HOLD
6: 26 Aug 16 2.96 2.95 BUY
7: 28 Nov 16 2.66 2.95 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
5
6
7
1.71
1.91
2.11
2.31
2.51
2.71
2.91
3.11
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY
HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM23.40 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM24.92 (6% upside) (Prev RM23.85) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger-than-expected sales volume, recovery in
oil prices, reduction in opex
Where we differ:Where we differ:Where we differ:Where we differ: Lower growth assumptions than consensus Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Revenue 25,171 25,789 26,291 26,799 EBITDA 1,461 1,505 1,572 1,644 Pre-tax Profit 1,085 1,155 1,206 1,262 Net Profit 790 847 885 926 Net Pft (Pre Ex.) 790 847 885 926 Net Pft Gth (Pre-ex) (%) 57.5 7.2 4.4 4.7 EPS (sen) 79.5 85.3 89.0 93.2 EPS Pre Ex. (sen) 79.5 85.3 89.0 93.2 EPS Gth Pre Ex (%) 57 7 4 5 Diluted EPS (sen) 79.5 85.3 89.0 93.2 Net DPS (sen) 64.4 63.9 66.8 69.9 BV Per Share (sen) 498 515 538 562 PE (X) 29.4 27.4 26.3 25.1 PE Pre Ex. (X) 29.4 27.4 26.3 25.1 P/Cash Flow (X) 37.7 18.6 17.8 17.0 EV/EBITDA (X) 15.2 14.7 14.0 13.2 Net Div Yield (%) 2.8 2.7 2.9 3.0 P/Book Value (X) 4.7 4.5 4.3 4.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 16.3 16.8 16.9 16.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 88.2 91.8 95.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 2 S: 3 H: 4
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Holding on in a weak market Maintain HOLD.Maintain HOLD.Maintain HOLD.Maintain HOLD. We are maintaining our FY17 earnings forecasts at this juncture, as sales volume remains lacklustre and PDB is slowing down on its new station openings. In the near term, we foresee earnings to be supported by continued cost management initiatives in mitigating the volatile oil prices. Nevertheless, we note that management had implemented better inventory management and brought down the average inventory turnaround days to approximately 4-5 days, compared to 10 days in previous financial years. Curtailed expansion planCurtailed expansion planCurtailed expansion planCurtailed expansion plan. In 1H16, PDB spent RM65m capex on the opening of new stations and refurbishment of existing stations. The retail segment will further expand the availability of Euro 5 Diesel at selected stations in 2H16. PDB will also focus on further enhancing the experience of its customers at the service stations. Given the challenging operating environment, PDB has curtailed its expansion plan to 10-15 stations p.a. (from 30 p.a.) in FY17. Limited volume growth. Limited volume growth. Limited volume growth. Limited volume growth. We do not foresee significant growth in earnings in FY17 due to flat volume growth in its retail and commercial segments. The group faces challenges from the prevailing weak consumer sentiment and continued weakness in the commercial diesel segment. PDB plans to tackle this issue by improving its operating margins. The retail segment will strive for higher sales of its petroleum products and focus on enhancing its customer experience and services, while the commercial segment will focus on expanding its market share by leveraging on its superior logistics, personalised services and differentiated offerings to serve its existing markets and penetrate into new markets. Valuation:
Limited upside.Limited upside.Limited upside.Limited upside. Our TP rises to RM24.92 (previously RM23.85)
as we roll forward our valuation, which is based on 28x FY17F
PE, its 5-year historical mean. We maintain our HOLD rating for
PDB is premised on the limited upside to our target price.
Key Risks to Our View:
Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression. PDB could
incur inventory losses, and experience margin compression if
crude prices fall sharply within a short period of time. At A Glance Issued Capital (m shrs) 993
Mkt. Cap (RMm/US$m) 23,247 / 5,258
Major Shareholders (%)
Petroliam Nasional Berhad 69.9
Employee Provident Fund 5.1
Free Float (%) 25.0
3m Avg. Daily Val (US$m) 2.5
ICB IndustryICB IndustryICB IndustryICB Industry : Oil & Gas / Oil & Gas Producers
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
Petronas Dagangan Version 3 | Bloomberg: PETD MK | Reuters: PETR.KL Refer to important disclosures at the end of this report
51
71
91
111
131
151
171
191
211
13.2
18.2
23.2
28.2
33.2
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Petronas Dagangan (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 36
Company Guide
Petronas Dagangan
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Retail volume to improve marginally.Retail volume to improve marginally.Retail volume to improve marginally.Retail volume to improve marginally. Sales of subsidised
petroleum products (i.e. RON95 and RON97 motorgas, diesel),
are classified under the retail segment, and distributed via PDB’s
network of petrol stations. At present, PDB operates c.1,109
petrol stations (Three stations were opened in 1Q16, and
enhancement works were carried out in 67 stations in
subsequent quarters). Management plans to open 10-15 new
petrol stations p.a. in FY17-18F. But despite the higher number
of stations and the enhancement initiatives, retail volumes
registered low y-o-y growth of 2% in 9MFY16, dragged by
diesel sales which were affected by the “Ops Titik” enforcement
activities (to curb the illegal smuggling of subsidised diesel to
neighbouring countries) and implementation of the managed
float pricing mechanism in Dec 2014. We expect PDB’s retail
volume to marginally grow by 2% p.a. in FY16-18F, assuming it
opens 15 new stations p.a. and same-store-sales growth is flat.
CommercialCommercialCommercialCommercial volume to grow by 2% p.a. in FY16volume to grow by 2% p.a. in FY16volume to grow by 2% p.a. in FY16volume to grow by 2% p.a. in FY16----18F.18F.18F.18F.
Commercial business comprises the sale of unsubsidised
petroleum products, and is predominantly made up of four key
products: diesel, aviation fuel, bitumen and fuel oil. Commercial
volume sales remained flat in 9MFY16, mitigated by higher
bitumen sales. Thereafter, we expect commercial volume to
further grow by 2% p.a. in FY16-17F, which is in line with the
CAGR registered in FY12-14. Higher volume sales can come
from resumption of aviation traffic growth, economic growth,
and large-scale road construction activities.
Other segments remain weak, but growth trajectory should be Other segments remain weak, but growth trajectory should be Other segments remain weak, but growth trajectory should be Other segments remain weak, but growth trajectory should be
higher in the future.higher in the future.higher in the future.higher in the future. LPG sales fell by 2% y-o-y in 9MFY16,
dragged by sales in both the household and bulk segments,
while lubricant sales fell by 11% y-o-y in the same period, as
distributors had drawn down their inventories prior to
implementation of GST in Apr 2015. We forecast LPG growth to
normalise to 1% p.a. in FY16-18F, driven by bulk LPG sales,
which is still seeing demand growth from SME and hospitality
users. We expect lubricants sales to normalise to 5% p.a. in
FY16-18F, backed by higher sales volume from Perodua, Naza
Kia, along with the marine and plantation segment.
Unit gross margins to maintain in FY17. Unit gross margins to maintain in FY17. Unit gross margins to maintain in FY17. Unit gross margins to maintain in FY17. PDB’s unit gross profit
fell 11% to 12.1 sen in FY14, precipitated by the sharp drop in
oil prices in 2H14, but this has since rebounded to 13.5 sen in
FY15. Current unit gross profit stands at 13.1sen. We forecast
unit gross profit will normalise to c.13.8 sen in FY16-18F.
Retail Volume (% y-o-y)
Commercial Volume (% y-o-y)
LPG Volume (% y-o-y)
Lubricant Volume (% y-o-y)
Gross Margin (%)
Source: Company, AllianceDBS
-1.9
-9.27
1.8 1.77 1.74
-10.2
-8.5
-6.8
-5.0
-3.3
-1.6
0.1
1.8
2014A 2015A 2016F 2017F 2018F
-6.64
1
2 2 2
-7.3
-5.4
-3.6
-1.7
0.2
2.0
2014A 2015A 2016F 2017F 2018F
0.53
-4.35
1 1 1
-4.78
-3.62
-2.46
-1.30
-0.14
1.02
2014A 2015A 2016F 2017F 2018F
4.66
-11
5 5 5
-12.1
-8.7
-5.2
-1.8
1.6
5.1
2014A 2015A 2016F 2017F 2018F
5.9
8.08 8.15 8.14 8.13
0.0
1.6
3.3
4.9
6.6
8.2
2014A 2015A 2016F 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 37
Company Guide
Petronas Dagangan
Balance Sheet:
Strong balance sheet pStrong balance sheet pStrong balance sheet pStrong balance sheet positionositionositionosition. . . . We expect PDB to stay net cash
in FY16-18F, helped by strong operating cash flow of RM1.0-
1.2bn p.a., which far exceeds its capex of <RM500m p.a.. PDB
ended FY14 with a cash pile of RM1.8bn (vs RM360m in FY13),
as subsidy receivables previously owed by the government were
repaid, following the abolishment of the fuel subsidy regime.
The cash pile dropped to RM1.3bn in FY15 due to repayment of
bank borrowings, but we expect it to grow to RM1.5/1.6bn in
FY16/17F.
Share Price Drivers:
Oil price outlook.Oil price outlook.Oil price outlook.Oil price outlook. Oil price fluctuations could significantly affect
PDB’s retail margins, due to inventory gains/losses. Petroleum
products’ retail prices are set based on the average Mean of
Platts Singapore (MOPS) price in the previous month, but PDB’s
net revenue for the retail products are linked to the average
MOPS price in the transacted month itself, as government will
levy a duty/compensate PDB to remove the difference. Thus,
PDB will achieve lower ASP and face margin compression in the
event of a sharp decline in oil prices, and vice versa.
Key Risks:
Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression.Falling oil prices could lead to margin compression. PDB could
experience margin compression, if crude prices continue to
trend down. This could be a drag on PDB’s earnings going
forward.
Expansion plan will raise Expansion plan will raise Expansion plan will raise Expansion plan will raise opex and startopex and startopex and startopex and start----up losses.up losses.up losses.up losses.
Management remains committed to expanding its network by
10-15 outlets annually. We concur with management that this
would benefit PDB in the long run, but the new petrol stations
could continue to drive up opex and start-up losses.
Company Background
PDB sells petroleum products through its domestic service
station operations. The group also has aviation fuelling
operations at KLIA and bunkering facilities at Westports, along
with marketing and lubricants distribution.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
2.8
2.9
3.0
3.1
3.2
3.3
0.00
0.05
0.10
0.15
0.20
0.25
2014A 2015A 2016F 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
100.0
200.0
300.0
400.0
500.0
600.0
2014A 2015A 2016F 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2014A 2015A 2016F 2017F 2018F
Avg: 33.1x
+1sd: 43.9x
+2sd: 54.8x
-1sd: 22.3x
-2sd: 11.4x10.3
20.3
30.3
40.3
50.3
60.3
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 4.86x
+1sd: 5.63x
+2sd: 6.41x
-1sd: 4.08x
-2sd: 3.3x
2.7
3.2
3.7
4.2
4.7
5.2
5.7
6.2
6.7
7.2
Dec-12 Dec-13 Dec-14 Dec-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 38
Company Guide
Petronas Dagangan
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Retail Volume (% y-o-y) (1.9) (9.3) 1.80 1.77 1.74
Commercial Volume (% y-o-y) (6.6) 1.00 2.00 2.00 2.00
LPG Volume (% y-o-y) 0.53 (4.4) 1.00 1.00 1.00
Lubricant Volume (% y-o-y) 4.66 (11.0) 5.00 5.00 5.00
Gross Margin (%) 5.90 8.08 8.15 8.14 8.13 Segmental Breakdown
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)
Retail 14,355 12,642 12,994 13,224 13,454
Commercial 15,368 10,244 10,449 10,658 10,871
LPG 1,639 1,348 1,362 1,375 1,389
Lubricants 510 445 467 491 515
Others 469 492 517 543 570
TotalTotalTotalTotal 32,34132,34132,34132,341 25,17125,17125,17125,171 25,78925,78925,78925,789 26,29126,29126,29126,291 26,79926,79926,79926,799
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 32,341 25,171 25,789 26,291 26,799
Cost of Goods Sold (30,432) (23,138) (23,686) (24,150) (24,621)
Gross ProfitGross ProfitGross ProfitGross Profit 1,9091,9091,9091,909 2,0332,0332,0332,033 2,1022,1022,1022,102 2,1402,1402,1402,140 2,1782,1782,1782,178 Other Opng (Exp)/Inc (1,203) (939) (981) (971) (957)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 706706706706 1,0941,0941,0941,094 1,1221,1221,1221,122 1,1701,1701,1701,170 1,2211,2211,2211,221
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 1.91 3.78 1.91 1.91 1.91
Net Interest (Exp)/Inc 1.80 (13.5) 31.2 34.6 39.1
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 710710710710 1,0851,0851,0851,085 1,1551,1551,1551,155 1,2061,2061,2061,206 1,2621,2621,2621,262 Tax (201) (290) (300) (314) (328)
Minority Interest (6.6) (4.7) (7.5) (7.9) (8.2)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 502502502502 790790790790 847847847847 885885885885 926926926926 Net Profit before Except. 502 790 847 885 926
EBITDA 1,049 1,461 1,505 1,572 1,644
Growth
Revenue Gth (%) 0.0 (22.2) 2.5 1.9 1.9
EBITDA Gth (%) (26.5) 39.2 3.0 4.5 4.5
Opg Profit Gth (%) (36.3) 55.1 2.5 4.3 4.4
Net Profit Gth (Pre-ex) (%) (38.2) 57.5 7.2 4.4 4.7
Margins & Ratio
Gross Margins (%) 5.9 8.1 8.2 8.1 8.1
Opg Profit Margin (%) 2.2 4.3 4.3 4.4 4.6
Net Profit Margin (%) 1.6 3.1 3.3 3.4 3.5
ROAE (%) 10.5 16.3 16.8 16.9 16.9
ROA (%) 5.1 9.0 10.1 9.9 10.1
ROCE (%) 9.1 14.3 16.0 16.2 16.3
Div Payout Ratio (%) 118.8 81.0 75.0 75.0 75.0
Net Interest Cover (x) NM 81.4 NM NM NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 39
Company Guide
Petronas Dagangan
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 6,529 6,048 4,929 5,331 5,537
Cost of Goods Sold (5,998) (5,644) (4,453) (4,886) (5,036)
Gross ProfitGross ProfitGross ProfitGross Profit 531531531531 403403403403 477477477477 445445445445 502502502502 Other Oper. (Exp)/Inc (230) (273) (181) (196) (172)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 301301301301 131131131131 295295295295 249249249249 330330330330 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.93 0.70 0.62 2.02 4.32
Net Interest (Exp)/Inc (4.2) (2.1) (1.8) (2.4) (2.2)
Exceptional Gain/(Loss) 0.0 0.0 0.0 33.2 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 298298298298 129129129129 294294294294 282282282282 332332332332 Tax (77.4) (36.8) (73.0) (66.7) (82.1)
Minority Interest (1.4) (0.2) (1.6) (0.5) (0.9)
Net ProfitNet ProfitNet ProfitNet Profit 219219219219 92.192.192.192.1 219219219219 215215215215 249249249249 Net profit bef Except. 219 92.1 219 182 249
EBITDA 379 262 377 348 423
Growth
Revenue Gth (%) 0.6 (7.4) (18.5) 8.2 3.9
EBITDA Gth (%) (17.2) (31.1) 44.2 (7.7) 21.5
Opg Profit Gth (%) (19.9) (56.6) 126.0 (15.5) 32.1
Net Profit Gth (Pre-ex) (%) (19.9) (57.9) 138.2 (17.1) 36.8
Margins
Gross Margins (%) 8.1 6.7 9.7 8.3 9.1
Opg Profit Margins (%) 4.6 2.2 6.0 4.7 6.0
Net Profit Margins (%) 3.4 1.5 4.5 4.0 4.5
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 4,532 4,482 4,789 4,888 4,967
Invts in Associates & JVs 9.52 13.3 13.3 15.2 17.1
Other LT Assets 8.23 9.41 8.23 8.23 8.23
Cash & ST Invts 1,840 1,259 1,453 1,602 1,781
Inventory 1,032 626 803 819 835
Debtors 2,119 1,649 1,690 1,723 1,756
Other Current Assets 0.0 32.6 0.0 0.0 0.0
Total AssetsTotal AssetsTotal AssetsTotal Assets 9,5419,5419,5419,541 8,0718,0718,0718,071 8,7578,7578,7578,757 9,0559,0559,0559,055 9,3659,3659,3659,365
ST Debt
360 98.5 100 100 100
Creditor 4,059 2,602 3,160 3,221 3,284
Other Current Liab 25.6 92.1 25.6 25.6 25.6
LT Debt 135 113 130 130 130
Other LT Liabilities 169 180 169 169 169
Shareholder’s Equity 4,752 4,952 5,117 5,346 5,585
Minority Interests 39.6 31.7 54.8 62.7 70.9
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 9,5419,5419,5419,541 8,0718,0718,0718,071 8,7578,7578,7578,757 9,0559,0559,0559,055 9,3659,3659,3659,365
Non-Cash Wkg. Capital (934) (387) (692) (705) (719)
Net Cash/(Debt) 1,345 1,047 1,223 1,372 1,551
Debtors Turn (avg days) 35.8 27.3 23.6 23.7 23.7
Creditors Turn (avg days) 52.1 53.4 45.1 49.0 49.1
Inventory Turn (avg days) 13.5 13.3 11.2 12.5 12.5
Asset Turnover (x) 3.3 2.9 3.1 3.0 2.9
Current Ratio (x) 1.1 1.3 1.2 1.2 1.3
Quick Ratio (x) 0.9 1.0 1.0 1.0 1.0
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 86.7 154.1 217.4 217.4 217.4
Z-Score (X) 7.2 8.9 8.0 7.9 7.9
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 40
Company Guide
Petronas Dagangan
Cash Flow Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 709 1,085 1,155 1,206 1,262
Dep. & Amort. 341 368 381 401 420
Tax Paid (237) (243) (300) (314) (328)
Assoc. & JV Inc/(loss) (1.9) (3.8) (1.9) (1.9) (1.9)
Chg in Wkg.Cap. 1,790 (589) 17.4 13.3 13.5
Other Operating CF (51.2) (0.3) 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 2,5502,5502,5502,550 617617617617 1,2511,2511,2511,251 1,3051,3051,3051,305 1,3661,3661,3661,366 Capital Exp.(net) (429) (326) (500) (500) (500)
Other Invts.(net) 23.5 54.6 0.0 0.0 0.0
Invts in Assoc. & JV (4.1) 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 0.0 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (409)(409)(409)(409) (272)(272)(272)(272) (500)(500)(500)(500) (500)(500)(500)(500) (500)(500)(500)(500) Div Paid (551) (616) (636) (656) (687)
Chg in Gross Debt (92.4) (284) 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (17.4) (24.3) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (661)(661)(661)(661) (925)(925)(925)(925) (636)(636)(636)(636) (656)(656)(656)(656) (687)(687)(687)(687)
Currency Adjustments 1.36 4.54 0.0 0.0 0.0
Chg in Cash 1,481 (575) 115 148 180
Opg CFPS (sen) 76.5 121 124 130 136
Free CFPS (sen) 214 29.2 75.6 81.0 87.2
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 22 Feb 16 25.34 23.85 HOLD
2: 12 May 16 22.72 23.85 HOLD
3: 15 Aug 16 23.48 23.85 HOLD
4: 09 Nov 16 23.40 23.85 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2 3
4
21.56
22.56
23.56
24.56
25.56
26.56
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY
HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM4.40 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM4.60 (5% upside)
Potential Catalyst:Potential Catalyst:Potential Catalyst:Potential Catalyst: Volume and capacity expansion
Where we differ:Where we differ:Where we differ:Where we differ: Lower margins assumptions Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com
What’s New • 2QFY17 earnings below expectations
• ILF PBT grew by 9% y-o-y, supported by
improvement in egg prices
• MPM PBT shrank on lower margins
• FamilyMart venture – first store opened
Price Relative
Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Revenue 2,853 3,273 3,610 4,042 EBITDA 372 415 473 551 Pre-tax Profit 249 280 329 396 Net Profit 192 211 248 300 Net Pft (Pre Ex.) 192 211 248 300 Net Pft Gth (Pre-ex) (%) 4.9 9.7 17.7 20.7 EPS (sen) 15.4 16.9 19.9 24.0 EPS Pre Ex. (sen) 15.4 16.9 19.9 24.0 EPS Gth Pre Ex (%) 5 10 18 21 Diluted EPS (sen) 15.4 16.9 19.9 24.0 Net DPS (sen) 4.25 5.06 5.96 7.20 BV Per Share (sen) 127 139 153 170 PE (X) 28.6 26.1 22.1 18.3 PE Pre Ex. (X) 28.6 26.1 22.1 18.3 P/Cash Flow (X) 20.2 20.6 16.9 14.7 EV/EBITDA (X) 16.4 14.8 13.0 11.1 Net Div Yield (%) 1.0 1.2 1.4 1.6 P/Book Value (X) 3.5 3.2 2.9 2.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 12.7 12.7 13.6 14.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 17.0 19.1 21.3 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 0 S: 2 H: 9
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Keep on sight Maintain HOLD.Maintain HOLD.Maintain HOLD.Maintain HOLD. We revise our earnings on the back of lower than expected MPM PBT margins in 1HFY17 at 17% against the historical/forecasted PBT margins of 20%. The lower PBT margin was mainly due to lower number of fish catch, thus increasing overall production cost. As such, we cut our earnings by 9%/5%/3% in FY17/FY18/FY19. FY17F PE valuation remains high at near 1SD above the mean PE, while near-term growth is moderated by the consolidation of prices of its surimi-based and poultry products after the strong surge in FY15. Although we continue to like QL for its diversified business model, we believe near-term growth initiatives are priced in and unlocking the long-term earnings potential of its expansion plans is a key re-rating catalyst.
Volume, capacity expansion tVolume, capacity expansion tVolume, capacity expansion tVolume, capacity expansion the next step.he next step.he next step.he next step. QL’s core staple food businesses will likely remain resilient despite expectations of a slowdown in Malaysia’s private consumption and economic growth. Hence, to boost near-term growth, QL plans to ramp up its regional feedmill production, aquaculture (prawn farming) project, and the volume of frozen surimi-based products plus snack foods for export.
FamilyMart venture to offer longFamilyMart venture to offer longFamilyMart venture to offer longFamilyMart venture to offer long----term synergies. term synergies. term synergies. term synergies. QL’s venture with Japan’s FamilyMart Co. Ltd targets to open 300 stores in five years. After the opening of the first store in Nov 2016 at Wisma Lim Foo Yong Jalan Raja Chulan, QL is looking to open another store in Dec 2016 and 10 more in 2017. The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. However, earnings impact in the near term is negligible given the prerequisite 2-3 years’ gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart’s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison.
Valuation: Our DCF-derived TP is RM4.60 (8.0% WACC, 5% TG), and implies 24x FY17F (ending March) PE.
Key Risks to Our View: Severe price volatility is a threat to commodity-intensive sectors like poultry. Prolonged weak product prices or high feed costs may hurt earnings, though QL’s integrated and diversified structure implies less earnings fluctuations than its peers. At A Glance Issued Capital (m shrs) 1,248 Mkt. Cap (RMm/US$m) 5,491 / 1,242 Major Shareholders (%) CBG Holdings Sdn Bhd 42.1 Farsathy Holdings Sdn Bhd 12.1
Free Float (%) 45.8 3m Avg. Daily Val (US$m) 0.27 ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Food Producers
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
QL Resources Version 4 | Bloomberg: QLG MK | Reuters: QLRES.KL Refer to important disclosures at the end of this report
81
101
121
141
161
181
201
221
1.8
2.3
2.8
3.3
3.8
4.3
4.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
QL Resources (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 42
Company Guide
QL Resources
WHAT’S NEW
Hiccups in MPM and POA
HighlightsHighlightsHighlightsHighlights
• 2QFY17 core earnings of RM50.5m (-8% y-o-y) were
below our/consensus expectations, with improvement in
the integrated livestock farming (ILF) segment’s earnings
being dragged by the decline in other segments.
Improvement in the ILF segment’s earningsImprovement in the ILF segment’s earningsImprovement in the ILF segment’s earningsImprovement in the ILF segment’s earnings
• The ILF division saw topline grew by 9% y-o-y to
RM443m, due to higher contribution from Malaysian
poultry operations and Indonesian feedmill unit.
• PBT grew by 17% y-o-y to RM29m. This was mainly
attributable to the increase in volume of raw feed trade
and also the increase in farm-produced prices;
particularly the improvement in egg price of 31 sen in
2Q17 compared to 30 sen in 2Q16.
• According to Department of Veterinary Services Malaysia
(DVS) website, the current average commercial egg price
(from grade AA to grade E) remained at c.32-sen levels
in Oct-Nov 2016. We believe QL’s blended ASP will stay
at this level for 3QFY17 with earnings being supported
by a gradual c.3% annual increase in production volume
from improved farm utilisation.
Exhibit 1: Malaysia’s average commercial egg price
Source: DVS, AllianceDBS Research
MPM slight hiccup in domestic demand, sales supported by MPM slight hiccup in domestic demand, sales supported by MPM slight hiccup in domestic demand, sales supported by MPM slight hiccup in domestic demand, sales supported by
stronger export stronger export stronger export stronger export
• QL’s marine products manufacturing (MPM) segment
revenue grew 6% y-o-y to RM219m, owing to higher
surimi-based products and fishmeal export contribution.
The segment had mainly benefited from its export
products (fishmeal, surimi and surimi-based products or
SBP) which gained from higher order volume.
• However, PBT contracted by 8% y-o-y to RM39m,
making up 55% of 2QFY17 group PBT (1QFY16: 60%).
This was due to the lower number of fish catch in
2QFY17 driving up production costs and a stronger
ringgit in the quarter compared to previous year.
• Consequently, MPM’s profitability has deteriorated with
a PBT margin of 18% in 2QFY17 (2QFY16: 21%).
• In 2QFY17, palm oil activities (POA) segment’s PBT
declined by 16% y-o-y despite the higher CPO price of
RM2,507/MT (2QFY16: RM2,041/MT). This was because
of: 1) lower contributions from its associate Boilermech
Holdings, and 2) lower FFB produced and processed by
the Sabah palm oil unit.
OutlookOutlookOutlookOutlook
FamilyMart venture to offer longFamilyMart venture to offer longFamilyMart venture to offer longFamilyMart venture to offer long----term synergiesterm synergiesterm synergiesterm synergies
• QL has signed an area franchise agreement with Japan’s
FamilyMart Co. Ltd to open 300 stores in five years. After
the opening of the first store in Nov 2016 at Wisma Lim
Foo Yong Jalan Raja Chulan, QL is looking to open
another store in Dec 2016 and 10 more in 2017.
• We anticipate capex needs for this venture to make up a
small proportion of QL’s total capex, as the requirement
per-store of c.RM200k is small in comparison to the
group’s expected annual capex of RM200-300m.
• The intention to focus on ready-to-eat F&B will bring
synergies to QL’s surimi-based products, snack foods,
and processed poultry product businesses. However, the
earnings impact in the near term is negligible given the
prerequisite 2-3 years’ gestation period. In the mid to
long term, positive accretion from this venture will
depend a lot on FamilyMart’s ability to differentiate itself
from its competitors such as 7-11 Malaysia and Bison.
MPM to expand into food manufacturing MPM to expand into food manufacturing MPM to expand into food manufacturing MPM to expand into food manufacturing
• QL plans to produce surimi-based products as an
extension of its existing Surabaya operations – this is in
progress and should be realised in three years.
Meanwhile, QL plans to set up a distribution centre in
Indonesia to provide an immediate channel to market its
surimi-based products from the plants in Hutan
Melintang and Johor.
• QL’s Hutan Melintang unit is constructing a new chilled
surimi-based production plant with an estimated capacity
of 25k MT, whose completion is slated for 3QFY18.
• Phase 1 of the new plant that specialises in frozen
surimi-based products in Kulai, Johor has been
completed, with full completion expected in the next
two years.
• The new plants will be technologically enhanced with
more automation, less manpower requirements and
improved production efficiency.
• QL is also ramping up its commercial prawn farming
initiative with expected earnings contribution of RM1-2m
in FY17. We are optimistic on the prospects of
0.318 0.332
0.372 0.369
0.296 0.305
0.320
0.299 0.300 0.313 0.319
0.200
0.250
0.300
0.350
0.400
0.450
0.500
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Avg Commercial ASP - QL Financial Year
Avg Blended Egg Price (Gred AA-Gred E)
ASIAN INSIGHTS VICKERS SECURITIES Page 43
Company Guide
QL Resources
commercially cultivated aquaculture-based products as this business carries high margins – similar to surimi-based products – and it is possible for QL to aggressively expand the farming volume in the future.
ILF to count on raw material feed trade for near-term earnings boost • The recent completion of the new commercial feedmill in
Bekasi, Indonesia is expected to increase FY17’s total group production by >200k MT/yr from >980k MT/yr currently. This additional volume allows QL to enhance its cost efficiency and expand further into commercial feedmilling.
• There are plans to build additional commercial feedmill plants in Indonesia and Malaysia, supported by
management’s efforts to replicate its local raw material trade business regionally.
Our interactive QL model We invite readers to explore the effects of changes in the various assumptions we imputed with our interactive model. We highlight two possible near-term scenarios: 1) egg oversupply, and 2) surimi price increase – these illustrate the stability of QL’s integrated and diversified business model, given the relatively contained net profit impact from both events.
Quarterly / Interim Income Statement (RMm)
FY Mar 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq
Revenue 690 670 730 5.7 9.0
Gross Profit 690 670 730 5.7 9.0
Other Oper. (Exp)/Inc (618) (612) (654) 5.8 6.9
Operating Profit 72.4 58.0 76.0 5.0 31.1
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 5.24 3.60 2.09 (60.2) (42.0)
Net Interest (Exp)/Inc (7.0) (8.8) (7.4) (6.2) 15.8
Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm
Pre-tax Profit 70.7 52.8 70.7 0.1 33.9
Tax (15.9) (11.5) (14.8) (6.5) 28.8
Minority Interest 0.34 0.84 (5.4) nm (742.3)
Net Profit 55.2 42.1 50.5 (8.4) 19.9
Net profit bef Except. 55.2 42.1 50.5 (8.4) 19.9
EBITDA 99.2 85.5 107 8.1 25.3
Margins (%)
Opg Profit Margins 10.5 8.7 10.4
Net Profit Margins 8.0 6.3 6.9
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 44
Company Guide
QL Resources
CRITICAL DATA POINTS TO WATCH
Earnings Drivers: Integrated food businesses to be resilient.Integrated food businesses to be resilient.Integrated food businesses to be resilient.Integrated food businesses to be resilient. QL has three key segments – marine product manufacturing (MPM), integrated livestock farming (ILF) and palm oil activities (POA). As staple protein food products, MPM and ILF product lines enjoy resilient demand. Also, QL’s integrated business operations with both upstream and downstream activities provide some cushion against the price volatility of commoditised goods like eggs, feed material and surimi. Surimi, the backbone of MPM.Surimi, the backbone of MPM.Surimi, the backbone of MPM.Surimi, the backbone of MPM. In FY16, QL produced up to 40k MT per annum of surimi – ground fish paste - whereby 25k MT came from Malaysia (split between plants in Perak and Sabah), and 15k MT from Surabaya, Indonesia. Based on management’s estimates, QL commands around 10% market share of surimi in ASEAN. Most of it is sold directly (typically exported), though around half of Malaysian production is used for surimi-based products (SBP) at the Hutan Melintang plant in Perak with a capacity of 55k MT/yr. Together, surimi and SBP make up 60-70% of MPM's revenue and PBT. The remainder comes from its sale of fishmeal (>30k MT/yr), deep-sea fishing, and its relatively new venture into aquaculture or prawn farming. Overall MPM is QL’s most profitable division, making up 25-30% of revenue but >50% of pretax as margins are strong at c.20%. Solid ILF presence.Solid ILF presence.Solid ILF presence.Solid ILF presence. QL is one of the three largest egg producers in Malaysia, with around 3.3m eggs per day (epd); plus c.0.65m epd in Indonesia and c.0.65m epd in Vietnam. Its other poultry presence is primarily in East Malaysia, with around 20m day-old chicks (DOC) and 12m broilers. Additionally, it has a production of around 20m DOC/yr in Indonesia. QL also has feedmills supplying its own blended feed to all eight farms; plus a poultry processing house in Sabah with capacity of 4,000 birds per hour. The integrated structure supports relatively steady ILF pretax margins of 5-8%. In FY16, ILF contributes c.60% to group revenue and >40% to group PBT. Feed material trading.Feed material trading.Feed material trading.Feed material trading. A differentiating factor for QL’s ILF division is its feed material trading, primarily involving the import of corn and soybean meal used to mix poultry feed. Trading an estimated >980k MT/yr of feed material in FY16, QL has a market share of about 20%. It enjoys cost advantages and stability over other pure poultry players, as feed material comprises up to 80% of COGS for layer and boiler operations. This volume-driven business is a significant contributor with up to 60% of ILF revenue and up to 50% of ILF PBT in FY16. POA still needs POA still needs POA still needs POA still needs time.time.time.time. In FY16, QL has c.10k ha of oil palm plantations in Kalimantan, Indonesia, plus three palm oil mills (two in Tawau, Sabah, and one in Tarakan, Indonesia). Due to the young age profile of its trees (1k ha immature, others 4-7 years old), and low CPO prices, the division has been loss-making. We expect a gradual turnaround as its palms mature to yield more fruit fresh fruit bunches (FFB), and CPO price recovers. Earnings at the pretax level have been held up by its 41.5% stake in Boilermech Holdings, which manufactures biomass boilers. It currently contributes a minimal c.5% of total group PBT.
Surimi prod (k MT)
Eggs prod (m/day)
Own FFB prod (k MT)
MPM key indicators and assumptions
ILF key indicators and assumptions
Source: Company, AllianceDBS
35
40
45 45 45
0.0
6.5
13.0
19.5
26.0
32.5
39.0
45.5
2015A 2016A 2017F 2018F 2019F
4.16
4.6 4.71 4.825.05
0.0
1.0
2.1
3.1
4.1
5.2
2015A 2016A 2017F 2018F 2019F
68
85.5
117
138
168
0.00
34.33
68.67
103.00
137.33
171.67
2015A 2016A 2017F 2018F 2019F
Total production (MT p.a.) FY15 FY16 FY17 FY18F FY19F
Surimi 35,000 40,000 45,000 45,000 45,000
Fishmeal 37,500 45,000 45,000 45,000 45,000
Surimi-based products 47,500 55,000 55,000 55,000 80,000
Aquaculture 600 1,500 1,800 2,813 4,230
Total production FY15 FY16 FY17F FY18F FY19F
Eggs (m/day) 4.2 4.6 4.7 4.8 5.1
DOC (m) 34.0 20.0 40.0 40.0 40.0
Broilers (m) 7.0 12.0 12.0 12.0 12.0
Traded feed material (MT) 900 980 1,200 1,257 1,320
ASP (RM)
Eggs (ea) 0.33 0.27 0.27 0.28 0.28
DOC (ea) 0.70 0.70 0.71 0.73 0.74
Broilers (/kg) 6.77 6.25 6.25 6.38 6.50
ASIAN INSIGHTS VICKERS SECURITIES
Page 45
Company Guide
QL Resources
Balance Sheet:
Solid balance sheet from strong cash flow.Solid balance sheet from strong cash flow.Solid balance sheet from strong cash flow.Solid balance sheet from strong cash flow. QL has a
manageable gearing level of <0.5x gross debt-to-equity (0.3x
net). Net interest cover is also secure at >8x. Given the strong
operating cash generation nature of its businesses, we think
that QL would have little trouble gearing up further for any
expansion needs. We also forecast QL to continue with a 30%
dividend payout, close to its historical trend, though there is no
fixed policy.
Share Price Drivers:
Key product pricing.Key product pricing.Key product pricing.Key product pricing. QL‘s share price is strongly correlated to
the pricing outlook and supply-demand dynamics of its core
products like eggs, broilers, surimi and fishmeal. Rising prices
from low supply or growing demand may boost its earnings and
share price.
Capacity expansion or downstream progress.Capacity expansion or downstream progress.Capacity expansion or downstream progress.Capacity expansion or downstream progress. Growing its
capacity will increase QL’s long-term earnings potential,
particularly for core products like surimi and eggs. We believe
that further expansion into the higher-margin surimi-based
products (SBP), particularly at its Indonesian and Sabah surimi
operations, also offers upside potential.
Key Risks:
Feed costs Feed costs Feed costs Feed costs volatility.volatility.volatility.volatility. ILF margins can be affected by higher feed
costs (corn and soybeans). But, as a feed material trader, QL
has an edge over industry peers with no direct access to the
materials.
Volatility in prices of commodity products. Volatility in prices of commodity products. Volatility in prices of commodity products. Volatility in prices of commodity products. QL is exposed to
risks of falling/weak chicken egg prices, which may be caused
by general supply-and-demand forces and seasonality. This
could affect ILF margins. On a regional basis, the large supply
growth of fishmeal and surimi can also drive down prices and
hurt the MPM segment.
Company Background
QL has three core businesses: ILF – integrated livestock farming
(chicken eggs, broilers, day-old chicks, feed material trading),
MPM – marine product manufacturing (surimi, surimi-based
products, frozen food), and POA – palm oil activities (palm oil
plantation, milling).
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
1.0
1.1
1.1
1.2
1.2
0.00
0.10
0.20
0.30
0.40
0.50
0.60
2015A 2016A 2017F 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
205.0
210.0
215.0
220.0
225.0
230.0
235.0
240.0
245.0
250.0
255.0
2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2015A 2016A 2017F 2018F 2019F
Avg: 22.3x
+1sd: 25.6x
+2sd: 29x
-1sd: 18.9x
-2sd: 15.6x
13.9
15.9
17.9
19.9
21.9
23.9
25.9
27.9
29.9
31.9
Dec-12 Dec-13 Dec-14 Dec-15
(x)
Avg: 3x
+1sd: 3.5x
+2sd: 4x
-1sd: 2.49x
-2sd: 1.99x
1.6
2.1
2.6
3.1
3.6
4.1
Dec-12 Dec-13 Dec-14 Dec-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 46
Company Guide
QL Resources
Key Assumptions
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Surimi prod (k MT) 35.0 40.0 45.0 45.0 45.0
Eggs prod (m/day) 4.16 4.60 4.71 4.82 5.05
Own FFB prod (k MT) 68.0 85.5 117 138 168 Segmental Breakdown
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)
MPM 733 835 864 925 1,199
POA 345 310 363 379 369
ILF 1,630 1,708 2,046 2,305 2,474
TotalTotalTotalTotal 2,7082,7082,7082,708 2,8532,8532,8532,853 3,2733,2733,2733,273 3,6103,6103,6103,610 4,0424,0424,0424,042
Pretax profit (RMm) MPM 127 164 163 192 245
POA 14.8 12.1 11.8 15.8 21.1
ILF 95.6 73.8 105 121 130
TotalTotalTotalTotal 246246246246 249249249249 280280280280 329329329329 396396396396
Pretax profit Margins (%)
MPM 17.4 19.6 18.9 20.8 20.5
POA 4.3 3.9 3.2 4.2 5.7
ILF 5.9 4.3 5.1 5.2 5.2
TotalTotalTotalTotal 9.19.19.19.1 8.78.78.78.7 8.58.58.58.5 9.19.19.19.1 9.89.89.89.8
Income Statement (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 2,708 2,853 3,273 3,610 4,042
Cost of Goods Sold (2,240) (2,351) (2,728) (3,004) (3,355)
Gross ProfitGross ProfitGross ProfitGross Profit 467467467467 501501501501 545545545545 606606606606 686686686686 Other Opng (Exp)/Inc (223) (232) (243) (255) (267)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 244244244244 269269269269 301301301301 351351351351 419419419419
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 23.3 12.6 10.7 11.3 11.8
Net Interest (Exp)/Inc (29.7) (32.5) (32.3) (33.9) (35.0)
Exceptional Gain/(Loss) 8.35 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 246246246246 249249249249 280280280280 329329329329 396396396396 Tax (50.0) (47.7) (58.8) (69.0) (83.1)
Minority Interest (4.5) (9.7) (10.3) (11.5) (13.2)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 191191191191 192192192192 211211211211 248248248248 300300300300 Net Profit before Except. 183 192 211 248 300
EBITDA 333 372 415 473 551
Growth
Revenue Gth (%) 10.2 5.4 14.7 10.3 12.0
EBITDA Gth (%) 10.9 11.7 11.7 14.0 16.5
Opg Profit Gth (%) 10.1 10.3 11.9 16.5 19.3
Net Profit Gth (Pre-ex) (%) 14.5 4.9 9.7 17.7 20.7
Margins & Ratio
Gross Margins (%) 17.3 17.6 16.6 16.8 17.0
Opg Profit Margin (%) 9.0 9.4 9.2 9.7 10.4
Net Profit Margin (%) 7.1 6.7 6.4 6.9 7.4
ROAE (%) 14.1 12.7 12.7 13.6 14.9
ROA (%) 7.9 7.1 7.2 7.8 8.6
ROCE (%) 8.8 9.0 9.1 9.7 10.7
Div Payout Ratio (%) 27.7 27.6 30.0 30.0 30.0
Net Interest Cover (x) 8.2 8.3 9.3 10.4 12.0
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 47
Company Guide
QL Resources
Quarterly / Interim Income Statement (RMm)
FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017 Revenue 690 738 769 670 730
Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0
Gross ProfitGross ProfitGross ProfitGross Profit 690690690690 738738738738 769769769769 670670670670 730730730730 Other Oper. (Exp)/Inc (618) (655) (712) (612) (654)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 72.472.472.472.4 83.183.183.183.1 56.556.556.556.5 58.058.058.058.0 76.076.076.076.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 5.24 2.14 1.55 3.60 2.09
Net Interest (Exp)/Inc (7.0) (8.7) (8.6) (8.8) (7.4)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 70.770.770.770.7 76.576.576.576.5 49.449.449.449.4 52.852.852.852.8 70.770.770.770.7 Tax (15.9) (12.4) (8.4) (11.5) (14.8)
Minority Interest 0.34 (6.3) (3.0) 0.84 (5.4)
Net ProfitNet ProfitNet ProfitNet Profit 55.255.255.255.2 57.957.957.957.9 38.138.138.138.1 42.142.142.142.1 50.550.550.550.5 Net profit bef Except. 55.2 57.9 38.1 42.1 50.5
EBITDA 99.2 106 85.5 85.5 107
Growth
Revenue Gth (%) 5.4 6.9 4.2 (12.9) 9.0
EBITDA Gth (%) 22.9 7.0 (19.5) 0.0 25.3
Opg Profit Gth (%) 26.8 14.8 (32.0) 2.7 31.1
Net Profit Gth (Pre-ex) (%) 34.8 4.9 (34.2) 10.6 19.9
Margins
Opg Profit Margins (%) 10.5 11.3 7.3 8.7 10.4
Net Profit Margins (%) 8.0 7.8 5.0 6.3 6.9
Balance Sheet (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 1,239 1,377 1,486 1,615 1,734
Invts in Associates & JVs 94.7 105 116 127 139
Other LT Assets 278 230 228 226 225
Cash & ST Invts 201 245 279 329 414
Inventory 335 375 430 475 531
Debtors 307 279 321 354 396
Other Current Assets 131 193 193 193 193
Total AssetsTotal AssetsTotal AssetsTotal Assets 2,5852,5852,5852,585 2,8042,8042,8042,804 3,0523,0523,0523,052 3,3183,3183,3183,318 3,6323,6323,6323,632
ST Debt
431 473 498 523 548
Creditor 238 267 307 338 379
Other Current Liab 16.8 13.5 13.5 13.5 13.5
LT Debt 326 303 328 353 378
Other LT Liabilities 73.7 79.9 79.9 79.9 79.9
Shareholder’s Equity 1,427 1,588 1,736 1,910 2,119
Minority Interests 72.9 79.3 89.6 101 114
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 2,5852,5852,5852,585 2,8042,8042,8042,804 3,0523,0523,0523,052 3,3183,3183,3183,318 3,6323,6323,6323,632
Non-Cash Wkg. Capital 518 566 624 669 728
Net Cash/(Debt) (556) (531) (547) (547) (512)
Debtors Turn (avg days) 39.0 37.5 33.5 34.1 33.8
Creditors Turn (avg days) 34.5 41.0 40.1 40.9 40.6
Inventory Turn (avg days) 47.8 57.6 56.2 57.3 57.0
Asset Turnover (x) 1.1 1.1 1.1 1.1 1.2
Current Ratio (x) 1.4 1.4 1.5 1.5 1.6
Quick Ratio (x) 0.7 0.7 0.7 0.8 0.9
Net Debt/Equity (X) 0.4 0.3 0.3 0.3 0.2
Net Debt/Equity ex MI (X) 0.4 0.3 0.3 0.3 0.2
Capex to Debt (%) 32.3 30.4 26.6 28.5 27.0
Z-Score (X) 0.0 0.0 0.0 0.0 0.0
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 48
Company Guide
QL Resources
Cash Flow Statement (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 246 249 280 329 396
Dep. & Amort. 88.5 102 114 122 132
Tax Paid (50.0) (47.7) (58.8) (69.0) (83.1)
Assoc. & JV Inc/(loss) (23.3) (12.6) (10.7) (11.3) (11.8)
Chg in Wkg.Cap. (71.5) (48.6) (57.1) (45.7) (58.6)
Other Operating CF 35.4 29.5 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 225225225225 272272272272 267267267267 325325325325 374374374374 Capital Exp.(net) (245) (236) (220) (250) (250)
Other Invts.(net) (0.4) 60.6 0.0 0.0 0.0
Invts in Assoc. & JV (37.2) 0.0 0.0 0.0 0.0
Div from Assoc & JV 4.82 0.0 0.0 0.0 0.0
Other Investing CF 0.0 2.38 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (277)(277)(277)(277) (173)(173)(173)(173) (220)(220)(220)(220) (250)(250)(250)(250) (250)(250)(250)(250) Div Paid (53.0) (53.0) (63.2) (74.4) (89.9)
Chg in Gross Debt 103 19.2 50.0 50.0 50.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (54.8) (12.3) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (5.2)(5.2)(5.2)(5.2) (46.1)(46.1)(46.1)(46.1) (13.2)(13.2)(13.2)(13.2) (24.4)(24.4)(24.4)(24.4) (39.9)(39.9)(39.9)(39.9)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash (57.5) 53.1 33.8 50.2 84.6
Opg CFPS (sen) 23.8 25.7 26.0 29.7 34.7
Free CFPS (sen) (1.6) 2.91 3.76 5.98 9.97
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 26 Feb 16 4.49 4.10 HOLD
2: 12 Apr 16 4.32 4.10 HOLD
3: 31 May 16 4.41 4.10 HOLD
4: 07 Jun 16 4.42 4.60 HOLD
5: 25 Aug 16 4.39 4.60 HOLD
6: 22 Nov 16 4.40 4.60 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
23
45 6
3.99
4.09
4.19
4.29
4.39
4.49
4.59
4.69
4.79
Dec-15 Apr-16 Aug-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC, PY
BUYBUYBUYBUY
Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 9 Dec 20169 Dec 20169 Dec 20169 Dec 2016)))): : : : RM1.36 (KLCIKLCIKLCIKLCI : : : : 1,641.42) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.58 (16% upside) (Prev RM1.58)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Earnings-accretive acquisition
Where we differWhere we differWhere we differWhere we differ:::: In line with consensus Analyst King Yoong CHEAH +60 32604 3908 cheahky@alliancedbs.com
What’s New • 4Q core earnings below expectations mainly due
to timing difference on contract recognition
• Remain positive on earnings prospects
• Maintain BUY, TP raised to RM1.58
Price Relative
Forecasts and Valuation FY FY FY FY AugAugAugAug ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Revenue 88.0 93.2 110 127 EBITDA 24.4 29.6 38.0 42.9 Pre-tax Profit 21.4 17.9 31.4 37.2 Net Profit 15.3 12.5 22.6 27.1 Net Pft (Pre Ex.) 15.3 16.8 22.6 27.1 Net Pft Gth (Pre-ex) (%) (1.0) 9.6 34.9 19.7 EPS (sen) 5.48 4.46 8.10 9.69 EPS Pre Ex. (sen) 5.48 6.00 8.10 9.69 EPS Gth Pre Ex (%) (1) 10 35 20 Diluted EPS (sen) 5.48 4.46 8.10 9.69 Net DPS (sen) 2.28 0.81 4.05 4.85 BV Per Share (sen) 37.7 51.8 56.2 62.9 PE (X) 24.8 30.5 16.8 14.0 PE Pre Ex. (X) 24.8 22.7 16.8 14.0 P/Cash Flow (X) 19.0 7.7 15.5 13.9 EV/EBITDA (X) 15.8 11.8 9.0 7.6 Net Div Yield (%) 1.7 0.6 3.0 3.6 P/Book Value (X) 3.6 2.6 2.4 2.2 Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) 14.5 10.0 15.0 16.3 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: N/A 8.40 14.2 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 0 H: 0
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Bookmark for the future Dominant player in the publishing industry. Dominant player in the publishing industry. Dominant player in the publishing industry. Dominant player in the publishing industry. Sasbadi Holdings (Sasbadi) serves as one of the best proxies to the Malaysian education sector, as it is a dominant player in the domestic educational publishing industry with c.10% market share. The group is well managed and enjoys high ROE and superior profitability, supported by a lean operating structure and complementary business models.
Sowing seeds for future growthSowing seeds for future growthSowing seeds for future growthSowing seeds for future growth. . . . FY16 core earnings of RM12.5m was below our expectations and consensus estimates. The key difference was mainly due to delay in reprinting of a textbook contract, which is due to be recognised in 1QFY17. We are positive on Sasbadi’s earnings prospects with (1) RM9.4m textbook tender secured, (2) reprinting contract and robotic contract to contribute in 1HFY17, and (3) network marketing starts taking shape. We adjust our earnings forecasts by <3%, mainly for bookkeeping purposes.
Network marketing Network marketing Network marketing Network marketing –––– key growth driver. key growth driver. key growth driver. key growth driver. Since obtaining the network marketing licence in April this year, management has been actively engaged in building members for the business. We gather that the group has so far recruited about 2,000 members and significant contributions will start to kick in from FY17 onwards. We are positive of the group engaging in such marketing strategies since we believe that the general market remains unfamiliar with its digital products and a more personalised marketing strategy could lead to better recognition and appreciation of such products by consumers. Valuation:
We maintain our BUY recommendation on Sasbadi with a
higher TP of RM1.58, upon rolling forward our valuation base
to CY17, based on a 17x PE. We continue to like Sasbadi as it
is one of the best proxies to the education sector and for its
hands-on management team.
Key Risks to Our View:
Failure to respond timely to changes in education policies
could hurt sales and earnings. At A Glance Issued Capital (m shrs) 279
Mkt. Cap (RMm/US$m) 380 / 85.9
Major Shareholders (%)
Law King Hui 18.3
Lee Swee Hang 8.5
Employees Provident Fund 5.8
Free Float (%) 62.8
3m Avg. Daily Val (US$m) 0.46
ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Services / Media
DBS Group Research . Equity
13 Dec 2016
Malaysia Company Guide
Sasbadi Holdings Berhad Version 5 | Bloomberg: SASB MK | Reuters: SAHO.KL Refer to important disclosures at the end of this report
89
139
189
239
289
0.5
0.7
0.9
1.1
1.3
1.5
1.7
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Relative IndexRM
Sasbadi Holdings Berhad (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 50
Company Guide
Sasbadi Holdings Berhad
WHAT’S NEW
Sowing seeds for future growth
FY16 results below expectation. FY16 results below expectation. FY16 results below expectation. FY16 results below expectation. Stripping out RM4.3m
negative goodwill recognition, the group registered FY16
core earnings of RM12.5m, which came in below our
expectations and consensus estimates. The key difference was
mainly delay in reprinting of a textbook contract, which is due
to be recognised in 1QFY17.
FY16FY16FY16FY16 ---- a a a a washout yearwashout yearwashout yearwashout year.... We acknowledge that FY16 has been
a challenging year for the group as (1) in early 2016,
substantial amount of its resources were spent on tenders for
new textbooks for primary and secondary schools, which
resulted in a delay in rolling out new reference books from
2QFY16 to 3QFY16, resulting in loss of revenues, (2) higher
cost incurred to expedite the proposal for a textbook tender
and, to build up its network marketing business, (3) timing
difference in contract recognition.
Sowing seeds for future growtSowing seeds for future growtSowing seeds for future growtSowing seeds for future growth.h.h.h. With (1) RM9.4m textbook
tender secured, (2) reprinting contract and robotic contract to
contribute in 1HFY17, (3) network marketing starts taking
shape, we remain positive on the group earnings prospects
going forward. We adjust our earnings forecasts by <3%,
mainly for bookkeeping purposes.
Network marketingNetwork marketingNetwork marketingNetwork marketing---- key growth driverkey growth driverkey growth driverkey growth driver.... Management believes
that the potential of its digital products (currently
contributing <10% of group revenue) remains underexplored
and they have intensified efforts to monetise products by: (1)
expanding its product portfolio; and (2) improvising its
marketing strategy to enhance product recognition. We
understand that since obtaining the network marketing
license, management has been actively engaged in building
members for the business in May and June. We gather that
the group has so far recruited about 2,000 members and
contributions will start to kick in from FY17 onwards. We are
positive of the group engaging in such marketing strategies
since we believe that the general market remains unfamiliar
with its digital products and a more personalised marketing
strategy could help the consumer to have better recognition
and appreciation of such products.
Maintain BUY with higher TP of RM1.58.Maintain BUY with higher TP of RM1.58.Maintain BUY with higher TP of RM1.58.Maintain BUY with higher TP of RM1.58. We maintain our
BUY recommendation for the group with a higher TP of
RM1.58, upon rolling forward our valuation base to CY17,
based on a 17x PE. We continue to like Sasbadi as it is one of
the best proxies to the education sector and for its hands-on
management team.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Revenue 20.1 22.4 15.9 (20.9) (29.0)
Cost of Goods Sold (11.8) (11.0) (9.6) (18.6) (12.4)
Gross ProfitGross ProfitGross ProfitGross Profit 8.278.278.278.27 11.411.411.411.4 6.266.266.266.26 (24.3)(24.3)(24.3)(24.3) (45.1)(45.1)(45.1)(45.1)
Other Oper. (Exp)/Inc (4.9) (5.7) (1.9) (61.5) (66.7)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 3.333.333.333.33 5.705.705.705.70 4.364.364.364.36 30.930.930.930.9 (23.5)(23.5)(23.5)(23.5)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 0.0 0.0 0.0 nm nm
Net Interest (Exp)/Inc 0.0 0.0 (0.2) nm nm
Exceptional Gain/(Loss) 0.0 0.0 (4.3) nm nm
PrePrePrePre----tax tax tax tax ProfitProfitProfitProfit 3.333.333.333.33 5.705.705.705.70 (0.1)(0.1)(0.1)(0.1) nmnmnmnm nmnmnmnm
Tax (0.6) (1.6) 0.02 (103.0) (101.2)
Minority Interest (0.5) (0.2) (0.1) 77.5 (49.0)
Net ProfitNet ProfitNet ProfitNet Profit 2.232.232.232.23 3.903.903.903.90 (0.2)(0.2)(0.2)(0.2) nmnmnmnm nmnmnmnm
Net profit bef Except. 2.23 3.90 4.13 85.1 6.0
EBITDA 4.29 8.50 5.41 25.9 (36.4)
Margins (%)
Gross Margins 41.1 50.9 39.4
Opg Profit Margins 16.6 25.4 27.4
Net Profit Margins 11.1 17.4 (1.0)
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 51
Company Guide
Sasbadi Holdings Berhad
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Publishing business Publishing business Publishing business Publishing business –––– bread and butter.bread and butter.bread and butter.bread and butter. As a dominant player in
Malaysia’s publishing industry, Sasbadi derives its income mainly
from the publication of educational materials. The group
focuses on National School Curriculum-based (NSC-based)
educational materials for primary and secondary education.
Over the past 30 years, the group has published millions of
books (>11,000 titles) and has >1,300 distribution points in
Malaysia.
M&A to strengthen its position.M&A to strengthen its position.M&A to strengthen its position.M&A to strengthen its position. In the domestic educational
publishing industry, the top three players have less than 25%
market share. To further strengthen its dominant position in the
publishing industry and drive income growth, management is
targeting to embark on at least one earnings-accretive
acquisition annually. We are optimistic that the acquisition of a
70% stake in Sanjung Unggul Sdn Bhd (SUSB), which is a major
publishing player in the national Chinese schools (Sekolah Jenis
Kebangsaan Cina) with c.1,300 book titles, will drive FY17
revenue growth by c.11%. We are also optimistic that the
successful acquisition of United Publishing could add about
RM1m-2m/annum to Sasbadi’s earnings.
Applied and online learning Applied and online learning Applied and online learning Applied and online learning products.products.products.products. Sasbadi is also involved in
the distribution of applied learning products (since 2005) and
online publishing (since 2011), which contributed <15% of FY6
revenue We expect the contributions from online products to
improve going forward with: (1) the launch of the i-LEARN
offline platform in end-CY15; and (2) the licence and services
agreement (LSA) with one of Indonesia’s largest book
publishers, PT Penerbit Erlangga. This would grant the publisher
an exclusive and non-transferable licence to use its interactive
online learning system i-LEARN, and sell the latter’s online
learning materials under its platform in Indonesia. In return,
Sasbadi would receive semi-annual royalties fees based on net
sales generated through the online platform in Indonesia.
Network marketing business could be another growth driver.Network marketing business could be another growth driver.Network marketing business could be another growth driver.Network marketing business could be another growth driver.
We understand that since obtaining the network marketing
licence, management has been actively engaged in building
members for the business in May and June. We gather that the
group has so far recruited about 2,000 members and significant
contributions will start to kick in from FY17 onwards. We are
positive of the group engaging in such marketing strategies
since we believe that the general market remains unfamiliar
with its digital products and a more personalised marketing
strategy could achieve better recognition and appreciation of
such products by consumers.
Incremental print publishing revenue (RM m)
Organic growth (excl. past year exam) (RM m)
GP margin (%)
Dividend payout ratio (%)
Source: Company, AllianceDBS
1.24
7.22
10.9
14.2
15.7
0.0
2.3
4.5
6.8
9.0
11.3
13.6
15.8
2014A 2015A 2016A 2017F 2018F
5.06
0.66
0
5
3.92
0.0
1.0
2.1
3.1
4.1
5.2
2014A 2015A 2016A 2017F 2018F
46.6 47.2 47.6 47.8 46.6
0.00
9.74
19.49
29.23
38.98
48.72
2014A 2015A 2016A 2017F 2018F
0 0
50 50 50
0.0
10.1
20.2
30.3
40.4
50.5
2014A 2015A 2016A 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 52
Company Guide
Sasbadi Holdings Berhad
Balance Sheet:
Healthy balance sheet.Healthy balance sheet.Healthy balance sheet.Healthy balance sheet. Sasbadi is in a net cash position as at
end-Aug 2016. Nonetheless, we do not discount that the group
may engage in capital-raising exercises should it undertake a
sizeable acquisition in the future.
Share Price Drivers:
Proxy to defensive education industry.Proxy to defensive education industry.Proxy to defensive education industry.Proxy to defensive education industry. Sasbadi is a good proxy
to Malaysia’s education industry, given that it is principally
involved in the provision of educational materials for primary
and secondary education. As such, any government policy
change to the educational sector may influence its share price.
Earnings delivery and earningsEarnings delivery and earningsEarnings delivery and earningsEarnings delivery and earnings----accretive acquisitions. accretive acquisitions. accretive acquisitions. accretive acquisitions. Sasbadi’s
share price will also be largely dependent on its earnings
delivery and the group’s ability to engage in earnings-accretive
acquisitions.
Key Risks:
Paper cost fluctuationPaper cost fluctuationPaper cost fluctuationPaper cost fluctuation.... A sudden surge in paper cost, which
represents about 40% of Sasbadi's cost of goods sold, would
hurt earnings.
Change in education policies. Change in education policies. Change in education policies. Change in education policies. Failure to respond to changes in
education policies in a timely manner would hurt sales and
earnings.
Company Background
Sasbadi is a market leader in the local educational publishing
industry with c.12% market share. The group is well managed
and enjoys high ROE and superior profitability, thanks to its
lean operating structure and complementary business model.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
0.6
0.7
0.7
0.8
0.8
0.9
0.9
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
2014A 2015A 2016A 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2014A 2015A 2016A 2017F 2018F
Avg: 16.7x
+1sd: 19.7x
+2sd: 22.6x
-1sd: 13.8x
-2sd: 10.8x9.7
11.7
13.7
15.7
17.7
19.7
21.7
23.7
25.7
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
(x)
Avg: 2.67x
+1sd: 3.13x
+2sd: 3.58x
-1sd: 2.21x
-2sd: 1.75x
1.5
2.0
2.5
3.0
3.5
4.0
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 53
Company Guide
Sasbadi Holdings Berhad
Key Assumptions
FY FY FY FY AugAugAugAug 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Incremental print publishing revenue (RM m)
1.24 7.22 10.9 14.2 15.7
Organic growth (excl. past year exam) (RM m)
5.06 0.66 0.0 5.00 3.92
GP margin (%) 46.6 47.2 47.6 47.8 46.6
Dividend payout ratio (%) 0.0 0.0 50.0 50.0 50.0
Income Statement (RMm)
FY FY FY FY AugAugAugAug 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 79.5 88.0 93.2 110 127
Cost of Goods Sold (42.4) (46.5) (48.9) (57.5) (67.6)
Gross ProfitGross ProfitGross ProfitGross Profit 37.037.037.037.0 41.541.541.541.5 44.444.444.444.4 52.652.652.652.6 59.059.059.059.0 Other Opng (Exp)/Inc (16.6) (20.0) (21.5) (21.4) (22.4)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 20.420.420.420.4 21.521.521.521.5 22.922.922.922.9 31.231.231.231.2 36.736.736.736.7 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (0.3) (0.1) (0.7) 0.24 0.49
Exceptional Gain/(Loss) (3.2) 0.0 (4.3) 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 16.916.916.916.9 21.421.421.421.4 17.917.917.917.9 31.431.431.431.4 37.237.237.237.2 Tax (4.6) (5.6) (4.8) (7.8) (9.1)
Minority Interest 0.0 (0.5) (0.6) (1.0) (1.0)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 12.312.312.312.3 15.315.315.315.3 12.512.512.512.5 22.622.622.622.6 27.127.127.127.1 Net Profit before Except. 15.5 15.3 16.8 22.6 27.1
EBITDA 23.0 24.4 29.6 38.0 42.9
Growth
Revenue Gth (%) 1.9 10.7 5.9 18.1 15.0
EBITDA Gth (%) 18.0 6.2 21.2 28.5 13.0
Opg Profit Gth (%) 16.1 5.4 6.4 36.2 17.7
Net Profit Gth (Pre-ex) (%) 21.2 (1.0) 9.6 34.9 19.7
Margins & Ratio
Gross Margins (%) 46.6 47.2 47.6 47.8 46.6
Opg Profit Margin (%) 25.7 24.4 24.5 28.3 29.0
Net Profit Margin (%) 15.4 17.4 13.4 20.5 21.4
ROAE (%) 13.1 14.5 10.0 15.0 16.3
ROA (%) 10.7 10.9 8.2 13.2 14.5
ROCE (%) 14.2 12.6 11.8 14.4 15.7
Div Payout Ratio (%) 69.4 41.5 18.0 50.0 50.0
Net Interest Cover (x) 62.9 215.0 31.6 NM NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 54
Company Guide
Sasbadi Holdings Berhad
Quarterly / Interim Income Statement (RMm)
FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 20.1 21.0 33.9 22.4 15.9
Cost of Goods Sold (11.8) (11.7) (16.5) (11.0) (9.6)
Gross ProfitGross ProfitGross ProfitGross Profit 8.278.278.278.27 9.299.299.299.29 17.417.417.417.4 11.411.411.411.4 6.266.266.266.26 Other Oper. (Exp)/Inc (4.9) (5.8) (8.1) (5.7) (1.9)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 3.333.333.333.33 3.523.523.523.52 9.309.309.309.30 5.705.705.705.70 4.364.364.364.36 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.0 (0.3) (0.3) 0.0 (0.2)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (4.3)
PrePrePrePre----tax Profittax Profittax Profittax Profit 3.333.333.333.33 3.243.243.243.24 9.009.009.009.00 5.705.705.705.70 (0.1)(0.1)(0.1)(0.1) Tax (0.6) (0.9) (2.3) (1.6) 0.02
Minority Interest (0.5) (0.3) 0.0 (0.2) (0.1)
Net ProfitNet ProfitNet ProfitNet Profit 2.232.232.232.23 2.032.032.032.03 6.706.706.706.70 3.903.903.903.90 (0.2)(0.2)(0.2)(0.2) Net profit bef Except. 2.23 2.03 6.70 3.90 4.13
EBITDA 4.29 4.46 11.2 8.50 5.41
Growth
Revenue Gth (%) 6.6 4.6 61.2 (33.9) (29.0)
EBITDA Gth (%) (4.7) 3.9 151.0 (24.1) (36.4)
Opg Profit Gth (%) (23.1) 5.6 164.4 (38.7) (23.5)
Net Profit Gth (Pre-ex) (%) (28.3) (9.0) 229.7 (41.8) 6.0
Margins
Gross Margins (%) 41.1 44.2 51.3 50.9 39.4
Opg Profit Margins (%) 16.6 16.7 27.4 25.4 27.4
Net Profit Margins (%) 11.1 9.7 19.8 17.4 (1.0) Balance Sheet (RMm)
FY FY FY FY AugAugAugAug 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 30.3 30.9 36.2 34.8 33.5
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 4.95 22.7 42.7 38.3 34.3
Cash & ST Invts 26.3 8.34 36.4 43.8 56.5
Inventory 20.2 37.1 20.5 23.6 27.8
Debtors 31.1 40.4 23.5 27.2 31.2
Other Current Assets 1.67 1.36 5.87 11.2 11.4
Total AssetsTotal AssetsTotal AssetsTotal Assets 114114114114 141141141141 165165165165 179179179179 195195195195
ST Debt
5.80 9.30 4.80 0.0 0.0
Creditor 8.00 13.4 2.05 2.36 2.78
Other Current Liab 2.48 1.60 6.35 7.09 8.05
LT Debt 0.20 0.10 0.10 0.10 0.10
Other LT Liabilities 4.30 6.10 6.10 6.10 6.10
Shareholder’s Equity 93.7 105 145 157 176
Minority Interests 0.0 5.10 1.00 6.10 2.00
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 114114114114 141141141141 165165165165 179179179179 195195195195
Non-Cash Wkg. Capital 42.5 63.9 41.4 52.5 59.6
Net Cash/(Debt) 20.3 (1.1) 31.5 43.7 56.4
Debtors Turn (avg days) 115.4 148.3 125.0 83.9 84.1
Creditors Turn (avg days) 45.8 89.6 66.8 15.9 15.3
Inventory Turn (avg days) 161.3 239.8 249.1 158.9 153.0
Asset Turnover (x) 0.8 0.7 0.6 0.6 0.7
Current Ratio (x) 4.9 3.6 6.5 11.2 11.7
Quick Ratio (x) 3.5 2.0 4.5 7.5 8.1
Net Debt/Equity (X) CASH 0.0 CASH CASH CASH
Net Debt/Equity ex MI (X) CASH 0.0 CASH CASH CASH
Capex to Debt (%) 112.8 37.2 634.7 1,000.0 1,000.0
Z-Score (X) 14.2 10.1 14.7 18.1 17.1
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 55
Company Guide
Sasbadi Holdings Berhad
Cash Flow Statement (RMm)
FY FY FY FY AugAugAugAug 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 16.9 21.4 23.8 31.4 37.2
Dep. & Amort. 2.58 2.90 5.84 6.84 6.28
Tax Paid (5.2) (5.9) (6.3) (7.8) (9.1)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (15.0) 0.0 25.7 (6.0) (7.1)
Other Operating CF 1.88 1.60 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 1.121.121.121.12 20.020.020.020.0 49.149.149.149.1 24.524.524.524.5 27.327.327.327.3 Capital Exp.(net) (6.8) (3.5) (31.1) (1.0) (1.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 (18.6) 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.04 0.10 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (6.7)(6.7)(6.7)(6.7) (22.0)(22.0)(22.0)(22.0) (31.1)(31.1)(31.1)(31.1) (1.0)(1.0)(1.0)(1.0) (1.0)(1.0)(1.0)(1.0) Div Paid (8.5) (3.8) (8.3) (11.3) (13.5)
Chg in Gross Debt (0.3) 0.90 (4.5) (4.8) 0.0
Capital Issues 25.2 0.0 31.2 0.0 0.0
Other Financing CF (2.3) (0.2) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 14.114.114.114.1 (3.1)(3.1)(3.1)(3.1) 18.418.418.418.4 (16.1)(16.1)(16.1)(16.1) (13.5)(13.5)(13.5)(13.5)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 8.52 (5.1) 36.4 7.35 12.8
Opg CFPS (sen) 5.78 7.16 8.38 10.9 12.3
Free CFPS (sen) (2.0) 5.91 6.44 8.40 9.41
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: King Yoong CHEAH
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 11 Dec 15 1.25 1.43 BUY
2: 14 Jan 16 1.33 1.43 BUY
3: 18 Jul 16 1.24 1.40 BUY
4: 27 Jul 16 1.22 1.40 BUY
5: 09 Aug 16 1.20 1.40 BUY
6: 01 Nov 16 1.35 1.58 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
5
6
0.97
1.07
1.17
1.27
1.37
1.47
1.57
Dec-15 Apr-16 Aug-16
RMRMRMRM
Industry Focus
Malaysian Consumer
Page 56
AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 13 Dec 2016 07:28:55 (MYT) Dissemination Date: 13 Dec 2016 08:25:27 (MYT)
GENERAL DISCLOSURE/DISCLGENERAL DISCLOSURE/DISCLGENERAL DISCLOSURE/DISCLGENERAL DISCLOSURE/DISCLAIMER AIMER AIMER AIMER
This report is prepared by This report is prepared by This report is prepared by This report is prepared by AllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn Bhd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities
(Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied,
photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of
addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal
or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of
profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This
document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no
obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.
Industry Focus
Malaysian Consumer
Page 57
ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. As of 13 Dec 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold
interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)
responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and
procedures are in place to ensure that confidential information held by either the research or investment banking function is handled
appropriately.
COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 31 Oct 2016.
Compensation for invesCompensation for invesCompensation for invesCompensation for investment banking services: tment banking services: tment banking services: tment banking services:
2. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:
3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION
GeneralGeneralGeneralGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
AustraliaAustraliaAustraliaAustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong KongHong KongHong KongHong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com.
IndonesiaIndonesiaIndonesiaIndonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.
MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Industry Focus
Malaysian Consumer
Page 58
SingaporeSingaporeSingaporeSingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
ThailandThailandThailandThailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
United KingdomUnited KingdomUnited KingdomUnited Kingdom This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
DubaiDubaiDubaiDubai
This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3
rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),
Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United StatesUnited StatesUnited StatesUnited States This report was prepared by AllianceDBS Research Sdn Bhd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictionsOther jurisdictionsOther jurisdictionsOther jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
AllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn Bhd
(128540 U) 19th Floor, Menara Multi-Purpose, Capital Square,
8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia.
Tel.: +603 2604 3333 Fax: +603 2604 3921 email : general@alliancedbs.com
top related