malaysia industry focus malaysian consumer sector...marketing and distribution of petroleum products...

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 [email protected] Inani ROZIDIN +603 2604 3905 [email protected]

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

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

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

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

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

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 [email protected]

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

Company Guide


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


Company Guide


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


Company Guide


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)


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


(x)


Company Guide


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



Company Guide



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



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)


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



Company Guide


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


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


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 [email protected]

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


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


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).


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


13 Dec 2016


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


Relative IndexRM

MSM Malaysia Holdings (LHS) Relative KLCI (RHS)


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.


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)



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


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 (%)






Company Guide



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)


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


Company Guide


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.


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.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2014A 2015A 2016F 2017F 2018F


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


(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


(x)


Company Guide


Key Assumptions


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




Gross ProfitGross ProfitGross ProfitGross Profit 467467467467 489489489489 324324324324 317317317317 362362362362

Other Opng (Exp)/Inc (132) (112) (140) (145) (196)



Net Interest (Exp)/Inc 9.17 0.32 (6.2) (3.3) (3.9)






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



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



Company Guide



FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 546 664 553 634 633


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


Net Interest (Exp)/Inc (2.3) 0.10 (1.7) (3.6) (1.3)


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)


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



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 474 671 918 1,173 1,100


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



ST Debt

248 420 420 420 420

Creditor 242 183 285 289 396


LT Debt 0.0 0.0 200 400 600


Shareholder’s Equity 1,945 2,042 1,992 2,031 2,070



Non-Cash Wkg. Capital 635 971 724 733 998

Net Cash/(Debt) 222 (296) (385) (607) (757)




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



Company Guide



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


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


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: AllianceDBS

Analyst: Inani ROZIDIN






Target Target Target Target



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


1

2

3

4

5

4.32

4.52

4.72

4.92

5.12

5.32


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 [email protected]

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


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.


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


Old Town International 42.6

Mawer Global Fund 10.0

JP Morgan Chase 3.7

Free Float (%) 46.1


ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Beverages


13 Dec 2016


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


Relative IndexRM

OldTown Berhad (LHS) Relative KLCI (RHS)


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%.


Company Guide

OldTown Berhad


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)


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


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.


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.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


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


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


(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)


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


FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 382 398 393 424 456


Gross ProfitGross ProfitGross ProfitGross Profit 134134134134 141141141141 146146146146 156156156156 166166166166 Other Opng (Exp)/Inc (67.7) (76.2) (75.6) (78.2) (81.1)


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


Minority Interest (1.4) (1.6) 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



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



Company Guide

OldTown Berhad


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


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


Minority Interest (0.1) (0.1) (0.1) 0.18 0.20


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



FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 123 125 126 122 120


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


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


LT Debt 20.4 15.7 12.1 12.1 12.1




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




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



Company Guide

OldTown Berhad


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


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: AllianceDBS







T arget T arget T arget T arget



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


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


RMRMRMRM


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


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


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.


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


Yong Pang Chaun Holdings Sdn Bhd 43.7

Skim Amanah Saham Bumiputera 5.0

iCapital.biz 3.5

Free Float (%) 50.1


ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Personal Goods


13 Dec 2016


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


Relative IndexRM

Padini Holdings (LHS) Relative JCI (RHS)


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.


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)



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)


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 (%)






Company Guide

Padini Holdings


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 (%)


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


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.


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.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


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


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


(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


(x)


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


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


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




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)


Margins & Ratio

Gross Margins (%) 46.2 43.2 41.7 42.0 42.0



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



Company Guide

Padini Holdings


FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 270 340 342 349 310


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




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


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


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



ST Debt

37.2 26.5 15.0 15.0 15.0

Creditor 110 138 158 184 193


LT Debt 15.0 12.5 12.5 12.5 12.5





Non-Cash Wkg. Capital 157 70.7 130 153 161

Net Cash/(Debt) 119 207 181 254 347




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



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



Company Guide

Padini Holdings


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



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: AllianceDBS










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


1

2

3

4

5

6

7

1.71

1.91

2.11

2.31

2.51

2.71

2.91

3.11


RMRMRMRM


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 [email protected]

Price Relative


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


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.


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


Petroliam Nasional Berhad 69.9

Employee Provident Fund 5.1

Free Float (%) 25.0


ICB IndustryICB IndustryICB IndustryICB Industry : Oil & Gas / Oil & Gas Producers


13 Dec 2016


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


Relative IndexRM

Petronas Dagangan (LHS) Relative KLCI (RHS)


Company Guide

Petronas Dagangan


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 (%)


-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


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.


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.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


0.0

100.0

200.0

300.0

400.0

500.0

600.0

2014A 2015A 2016F 2017F 2018F


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


(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


(x)


Company Guide

Petronas Dagangan

Key Assumptions


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





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



Net Interest (Exp)/Inc 1.80 (13.5) 31.2 34.6 39.1


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)



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



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



Company Guide

Petronas Dagangan


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 6,529 6,048 4,929 5,331 5,537


Gross ProfitGross ProfitGross ProfitGross Profit 531531531531 403403403403 477477477477 445445445445 502502502502 Other Oper. (Exp)/Inc (230) (273) (181) (196) (172)







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



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


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



ST Debt

360 98.5 100 100 100

Creditor 4,059 2,602 3,160 3,221 3,284


LT Debt 135 113 130 130 130

Other LT Liabilities 169 180 169 169 169




Non-Cash Wkg. Capital (934) (387) (692) (705) (719)

Net Cash/(Debt) 1,345 1,047 1,223 1,372 1,551




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



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



Company Guide

Petronas Dagangan


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


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


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)


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: AllianceDBS










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


1

2 3

4

21.56

22.56

23.56

24.56

25.56

26.56


RMRMRMRM


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 [email protected]

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


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


13 Dec 2016


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


Relative IndexRM

QL Resources (LHS) Relative KLCI (RHS)


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)


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.


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


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 (%)




http://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?easyAccessToken=PROVIDER_a0063f1911c10534e7a8b0b185eff7884ffec709

http://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52216&derivedToken=d430b0a6e54cafe4c8ac6517ad157f9faaf71b57

http://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52216&derivedToken=d430b0a6e54cafe4c8ac6517ad157f9faaf71b57

http://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52217&derivedToken=a5e60ec35d13620e350403f594b45c527478e75b


Company Guide

QL Resources


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


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


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.


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).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


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


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


(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


(x)


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


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


FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 2,708 2,853 3,273 3,610 4,042


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









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



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



Company Guide

QL Resources


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)






Minority Interest 0.34 (6.3) (3.0) 0.84 (5.4)


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



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


ST Debt

431 473 498 523 548

Creditor 238 267 307 338 379


LT Debt 326 303 328 353 378



Minority Interests 72.9 79.3 89.6 101 114


Non-Cash Wkg. Capital 518 566 624 669 728

Net Cash/(Debt) (556) (531) (547) (547) (512)




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



Company Guide

QL Resources


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


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




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: AllianceDBS










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


1

23

45 6

3.99

4.09

4.19

4.29

4.39

4.49

4.59

4.69

4.79


RMRMRMRM


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


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


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.


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


Law King Hui 18.3

Lee Swee Hang 8.5

Employees Provident Fund 5.8

Free Float (%) 62.8


ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Services / Media


13 Dec 2016


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)


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.


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)


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)



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 (%)



Net Profit Margins 11.1 17.4 (1.0)



Company Guide



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 (%)


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


Company Guide


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.


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.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2014A 2015A 2016A 2017F 2018F


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


(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


(x)


Company Guide


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


FY FY FY FY AugAugAugAug 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 79.5 88.0 93.2 110 127


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)



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


Minority Interest 0.0 (0.5) (0.6) (1.0) (1.0)


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


Margins & Ratio

Gross Margins (%) 46.6 47.2 47.6 47.8 46.6



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



Company Guide



FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 20.1 21.0 33.9 22.4 15.9


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)



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


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


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



ST Debt

5.80 9.30 4.80 0.0 0.0

Creditor 8.00 13.4 2.05 2.36 2.78


LT Debt 0.20 0.10 0.10 0.10 0.10


Shareholder’s Equity 93.7 105 145 157 176



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




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



Company Guide



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


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


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)


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: AllianceDBS










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


1

2

3

4

5

6

0.97

1.07

1.17

1.27

1.37

1.47

1.57


RMRMRMRM

Industry Focus

Malaysian Consumer

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

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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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Industry Focus

Malaysian Consumer

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

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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

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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.

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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.

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For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

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Wong Ming Tek, Executive Director, ADBSR

Industry Focus

Malaysian Consumer

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.

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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),

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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.

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malaysia industry focus malaysian consumer sector...marketing and distribution of petroleum products...

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