Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on July 3, 2018

Apollo Food Holdings Bhd
(July 2, RM4.16)
Maintain neutral with a lower target price (TP) of RM3.59:
Apollo Food Holdings Bhd’s results were below expectations due to the lower-than-expected sales in both local and export markets. Post results, we cut our financial year 2019 (FY19) and FY20 earnings forecasts by 11% and 13% to reflect our more conservative sales growth assumptions. Despite the lacklustre sales growth and lack of growth drivers, we believe its generous dividend payout, backed by a sturdy balance sheet, would continue to support the share price.

Apollo Food’s FY18 (April) core net profit of RM12.4 million (-30.5% year-on-year [y-o-y]) was below our expectations, accounting for just 77% of our full-year forecast. The negative deviation could be attributed to the lower-than-expected sales in both local and export markets. This could be due to the soft market conditions as well as intense competition, in our view. The group has proposed dividend per share of 20 sen (FY17: 25 sen), which implies a yield of 4.8%.

Y-o-y, FY18 revenue fell 8.7% to RM190.8 million, as both local and export markets recorded softer sales, for the above-mentioned reasons. The FY18 gross profit margin expanded by 0.8 percentage point to 21.2%, driven, we believe, by more favourable cost dynamics. However, the FY18 core net profit (after adjusting for RM1.3 million in disposal loss) still slumped, on the back of the lacklustre sales.

Management expects the higher costs of material and foreign exchange volatility to continue posing challenges in the competitive market environment. However, it expects to maintain its market position by implementing prudent measures and improving operational efficiency. We expect the flattish growth trend to continue, as we are not made aware of any large-scale expansion plans. We also believe the company may have to beef up its marketing initiatives and/or introduce new products, in order to arrest the uninspiring sales growth.

Post results, we cut our FY19 forecast (FY19F) and FY20F earnings by 13% and 11% respectively to reflect our more conservative sales growth assumptions.  

TP correspondingly lower at RM3.59 (from RM3.68) after rolling over our valuation base year to 2019. Our TP is based on unchanged price-earnings (PE) of 17 times, in line with its five-year mean PE, and implies an around 23% discount to two-year forward sector PE of 22 times.

We think the valuation is justified given the lack of growth drivers and susceptibility to fluctuations in raw material costs. However, this is balanced by its long-standing track record, established brand names, and sturdy balance sheet along with attractive forecast dividend yields. Risks to our recommendation include a sharper-than-expected rise in input costs and diversification into new product lines. — RHB Research Institute, June 29

 

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