Company Result 25 August 2017 Oriental Food Industries Holdings Berhad On a steady path

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1 JF APEX SECURITIES BERHAD (47680-X) Company Result 25 August 2017 Oriental Food Industries Holdings Berhad On a steady path HOLD Maintained KLCI 1771 points Share Price RM1.61 Target Price RM1.61 Expected share price return 0% Expected dividend return 2.9% Expected total return 2.9% Stock Data Bursa / Bloomberg code 7107 / OFIH MK Market / Board Main / Industrial Syariah Compliant status Yes Issued shares (m) Market cap RM Par value RM week price Range RM Beta (against KLCI) m Average Daily Volume 0.05m 3-m Average Daily Value^ RM0.08m Share Performance 1m 3m 12m Absolute (%) Relative (%-pts) Major Shareholders % CHEN CHUAN SON SYARIKAT PERNIAGAAN CHONG RHB ASSET MANAGEMENT SB 7.21 Estimated free float Source: Bloomberg Lee Chung Cheng , ext. 758 cclee@jfapex.com.my Result Comment Core earnings in line with expectation. Oriental Food Industries (OFI) recorded 1QFY18 core net profit of RM4.1m (including forex loss of RM1.0m during the quarter), rising 13.6% yoy and 8.1% qoq. 1QFY18 results are within our forecast and constitute 21% of our full year earnings estimate. Better quarterly results. The better yoy performance was mainly attributable to higher revenue achieved, +5.4% yoy. On qoq basis, the higher earnings were mainly due to significantly lower effective tax rate during this quarter, 15% (vs 34% in 4QFY17) amid higher cost of sales as a result of higher raw material costs. Improvement in local sales. During this quarter, we saw significant improvement in local sales, up 14.3% yoy (vs Asia Pacific s sales of +4.9% yoy and other export markets sales of -7.2% yoy). Overall, OFI s topline was still mainly underpinned by export markets (64% vs 36% local sales in 1QFY17) with 45% from Asia Pacific alone. Better 2H. We envisage OFI to deliver moderately higher earnings in 2HFY18 with the commencement of operations for its new product, biscuit segment (estimated annual capacity of 10,800MT) and two additional potato crisps production lines (with estimated annual capacity of 3500MT). However, it will take 3-5 years for the new products, particularly the biscuits products, to reach their full capacity in view of time taken for marketing efforts, publicity of the products and acceptance of consumers in order to gain market share in a highly competitive biscuit business. Proposed first interim dividend of 1.0 sen/share. As usual, the Group will announce dividend for every quarter of the year. OFI has proposed an interim dividend of 1.0 sen/share for this quarter which will go ex on 11 Sept 17. Earnings Outlook/Revision No change to our earnings forecasts. We estimate the Group s FY2018F and FY2019F reported net profits to grow moderately by 6.7% to RM19.5m and 11.5% to RM21.8m, on the back of higher toplines, +7.5% yoy and 7.0% yoy respectively. Core net earnings wise (after excluding unrealised and realised forex gains of RM4.2m in FY2017), we envisage Please read carefully the important disclosures at end of this publication

2 the Group s FY2018F performance to surge by 29.3% yoy. We have imputed the contributions of the 2 new lines of potato snacks and 1 new line of biscuit production, which will commence operations in coming months, into our earnings forecasts. Valuation/Recommendation Maintain HOLD on OFI with an unchanged target price of RM1.61, based on 17.7x FY2019F PE. The target PER is at the upcycle PE of the stock, i.e standard deviation (SD) above its 3-year mean PE of 16.7x. While we favour the Group as being a defensive stock that provides consistent dividend and stable earnings, coupled with its less cyclical nature of business, we opine that the stock is fully valued at this junction and renders limited upside with its unappealing dividend yield of less than 3.5%. Figure 1: Quarterly Figures Year to 31 March (RMm) 1QFY18 4QFY17 1QFY17 qoq % yoy % Revenue Gross Profit EBIT PBT Net Profit Core Net Profit Gross margin (%) / ppt EBIT margin (%) / ppt PBT margin (%) / ppt Geographical Breakdown - Topline (RMm) Malaysia Asia Pacific Middle East, Africa, America, Europe Source: Company, JF Apex 2

3 Figure 2: Financial Summary FYE Mar FY2015 FY2016 FY2017 FY2018F FY2019F (RMm) Revenue Cost of sales Gross Profit Other operating income Selling & distribution Administrative Other operating expenses EBIT Finance cost PBT Tax expenses PAT MI Reported Net Profit Core Net Profit Revenue growth 4.5% 3.3% 4.6% 7.5% 7.0% Cost of sales -76.2% -73.9% -78.4% -77.2% -76.6% Other operating income 1.2% 2.6% 1.9% 1.7% 1.5% Selling & distribution -9.4% -9.2% -8.1% -8.5% -8.5% Administrative -4.8% -5.5% -6.1% -6.7% -6.7% Other operating expenses -0.1% -0.6% 0.0% -0.1% -0.1% EBIT growth 22.5% 27.0% -27.4% 7.3% 11.6% Effective tax rate -15.4% -20.6% -20.8% -21.0% -21.0% PBT growth 22.7% 26.4% -28.0% 7.0% 11.5% Net Profit growth 31.9% 18.6% -28.2% 6.7% 11.5% Core Earnings growth 17.5% 23.3% -38.0% 29.3% 11.5% GP margin 23.9% 26.1% 21.6% 22.8% 23.4% EBIT margin 10.8% 13.3% 9.2% 9.2% 9.6% PBT margin 10.7% 13.1% 9.0% 9.0% 9.4% Net profit margin 9.1% 10.4% 7.1% 7.1% 7.4% Core earnings margin 8.3% 10.0% 5.9% 7.1% 7.4% Number of shares EPS (sen) EPS (Core) DPS (sen) Dividend payout 55.1% 61.2% 52.5% 55.3% 55.1% Dividen yield 3.1% 4.0% 2.5% 2.8% 3.1% P/E (x) P/E (Core) (x) BV/share P/B (x)

4 Net gearing / (cash) (x) ROE 13.4% 14.7% 10.0% 9.2% 8.8% ROA 10.5% 11.3% 7.7% 7.1% 6.9% Source: Company, JF Apex Figure 3: Historical 3-Year PE Band Source: Bloomberg, JF Apex 4

5 JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah Kajang Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) DEALING TEAM Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team: Lim Teck Seng Fathul Rahman Buyong (ext 741) Ahmad Mansor (ext 744) Zairul Azman (ext 746) PJ Office: Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111) RESEARCH TEAM Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Low Zy Jing (ext 754) Nazhatul Shaza binti Shukor (ext 755) Nursuhaiza Binti Hashim (ext 752) JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY : The stock s total returns* are expected to exceed 10% within the next 12 months. HOLD : The stock s total returns* are expected to be within +10% to 10% within the next 12 months. SELL : The stock s total returns* are expected to be below -10% within the next 12 months. TRADING BUY : The stock s total returns* are expected to exceed 10% within the next 3 months. TRADING SELL : The stock s total returns* are expected to be below -10% within the next 3 months. SECTOR RECOMMENDATIONS OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months. MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to 10% within the next 12 months. UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months. *capital gain + dividend yield JF APEX SECURITIES BERHAD DISCLAIMER Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad. This report is also accessible at Published & Printed By: JF Apex Securities Berhad (47680-X) (A Participating Organisation of Bursa Malaysia Securities Berhad) 5