This article first appeared in The Edge Financial Daily on April 1, 2019

Apollo Food Holdings Bhd
(March 29, RM3.92)
Maintain neutral and an unchanged target price (TP) of RM3.66: Cumulative nine months for financial year 2019 (9MFY19) earnings came in broadly within expectations, but fourth quarter (4QFY19) earnings are likely to be weaker. The operating environment is expected to remain challenging moving forward, while earnings growth is projected to come from improved operational efficiencies. The stock continues to offer attractive prospective yields of 6.3-7.6%, backed by the group’s sturdy balance sheet and established brand names.

3QFY19 core earnings of RM4.5million (+113% year-on-year [y-o-y], -10% quarter-on-quarter [q-o-q]) were broadly within our forecast, as we expect 4QFY19 to be seasonally weaker due to a shorter working month in February. This brings the group’s cumulative 9MFY19 core earnings to RM13.8 million (+42% y-o-y). After two consecutive quarters of weaker sales, Apollo’s 3QFY19 revenue rebounded, growing by 11% y-o-y and 10% q-o-q. Margins remained stable but no dividend was declared.

Management expects the operating environment to remain challenging moving forward, in view of increasing raw material costs and volatile foreign exchange. The competitive market will likely limit Apollo’s sales growth, coupled with the absence of any significant expansion plans or new product launches. Earnings growth should therefore be driven by improvement of operational efficiencies.

We make no changes to our earnings forecasts. Downside risk to our TP and recommendation is higher-than-expected input costs, while upside risk is the diversification into new product lines. — RHB Research Institute, March 29