CONFECTIONERY maker Apollo Food Industries Bhd has been experiencing what could be its toughest times in recent years, sandwiched between the challenges of rising production costs and lacklustre consumer spending.
Last Thursday, the Johor-based snack food maker posted its fourth consecutive quarter of year-on-year earnings contraction.
Net profit for its second quarter ended Oct 31, 2016 (2QFY2017) plunged 55.5% to RM4.293 million from RM9.642 million a year ago, with revenue sliding 10.54% to RM48.127 million from RM53.796 million a year ago.
For the six-month period, net profit has fallen 52% to RM9.992 million from RM20.829 million a year ago. Revenue, however, only declined 5.42% to RM98.109 million from RM103.728 million a year ago.
Apollo certainly saw better results prior to 2015. Over the last five financial years, Apollo’s peak earnings were in FY2013 and FY2014, when its net profit crossed the RM30 million mark at RM32.083 million and RM33.471 million respectively.
Net profit fell 24.4% in FY2015 to RM25.29 million before rising 17.6% to RM29.7 million in FY2016.
Given Apollo’s weak 1HFY2017 results of RM9.99 million in net profit, the company has some way to go in order to end the current financial year in the RM20 million to RM30 million region that it previously enjoyed.
Apollo — which manufactures and distributes chocolate wafers, layer cakes and Swiss roll cakes — attributed the poor earnings to slower sales overseas and thinner margins due to rising raw material prices.
Apollo is not alone in facing these pressures. Its strained earnings underscore a major problem that other snack food and confectionery makers face — the rising cost of raw materials, coupled with the difficulty of passing on increased costs to consumers given the prolonged soft consumer sentiment.
What this means is that the profit margins of snack food manufacturers have been compressed, even if they have been able to maintain similar levels of sales at the very least.
What is worse is that these macroeconomic pressures are certainly not going away anytime soon. AmInvestment Research notes that the consumer sector will continue to contend with higher operating costs in 2017 owing to rising associated costs.
These include higher logistics costs, given the increased toll rates for certain Klang Valley highways, and higher energy costs, since average gas tariffs have gone up 5.95% from July 15 last year and electricity costs have risen 32% to 1.52 sen per Kwh.
Food-related manufacturers will also have to manage higher raw material costs, including a 24% hike in the price of a 25kg bag of wheat flour and a 30% to 32% increase in premium and wholesale sugar prices, AmInvestment Research adds.
Labour cost has also gone up, with the minimum wage increasing from RM900 to RM1,000 from July 1 last year and annual foreign worker levy fees rising 48% to RM1,850 from RM1,250 for the manufacturing and service sectors.
Then, there is the lacklustre ringgit, which affects manufacturers that derive a portion of their revenue from export sales and when purchasing raw materials like cocoa and palm oil that are tied to global commodity prices.
As Apollo points out, the operating environment will continue to be tougher in the current and coming financial years given rising raw material costs and the volatility of the ringgit against foreign currencies.
“Despite a challenging environment, the board is of the opinion that the group will be able to maintain its market position by implementing prudent measures and improving operational efficiency to safeguard the group’s profitability,” Apollo says in the notes to its recent financial results.
Other snack food makers face dwindling earnings
Apollo certainly is not alone. There are seven snack food and confectionery manufacturers listed on Bursa Malaysia: Apollo, Hup Seng Industries Bhd, Hwa Tai Industries Bhd, Khee San Bhd, London Biscuits Bhd, Oriental Food Industries Holdings Bhd and Pan Malaysia Corp Bhd (PMC).
All these companies have long complained of higher input cost pressures on their businesses and are finding ways to cushion these impacts. The majority — five out of the seven — have seen earnings pressure in recent quarters.
Oriental Food saw its net profit for 2QFY2017 ended Sept 30 almost halve to RM5.38 million from RM10.73 million a year ago, despite revenue rising 7.04% to RM60.05 million for the quarter. For the six-month period, Oriental Food’s net profit was down 43.54% to RM9.493 million from RM16.81 million a year ago.
Hwa Tai returned to the black in its 3QFY2016 ended Sept 30 with a net profit of RM186,000 from a net loss of RM246,000 during the same period last year. But cumulatively, it is still in the red with a net loss of RM2,000, narrowing from RM719,000 a year ago.
Hup Seng remains profitable but saw its net profit for 3QFY2016 ended Sept 30 fall 13.9% to RM9.96 million from RM11.57 million a year ago, despite revenue remaining stable at RM64.5 million. For the nine months, its net profit was down 13.63% to RM33.98 million from RM39.34 million a year ago.
PMC’s earnings also fell. Its net profit for 1QFY2017 ended Sept 30 plunged 75.5% to RM1.318 million from RM5.388 million a year ago.
This was due to a lower unrealised foreign exchange gain, given the depreciating ringgit against the Singapore dollar, when it translated the amount owed by a foreign subsidiary.
Higher domestic sales of PMC’s chocolate and confectionery products, however, did drive up revenue 8.77% to RM18.264 million.
The company says it remains cautious about its financial performance in the year ahead but will seek more emerging markets in Asia to sell its products in and explore collaborative opportunities to improve profitability.
It is noteworthy that in May 2016, PMC completed a share capital reduction exercise to rationalise its balance sheet and wipe out accumulated losses of approximately RM613.6 million based on its audited financial statements for its FY2014 ended Dec 31, 2014.
The accumulated losses were largely attributed to a provision made in 2004 totalling RM1.056 billion when it wound up its subsidiary Syahdu Pinta Bhd.
But on the whole, PMC noted that it has been profitable for the last five financial years up to Dec 31, 2014, except for FY2010 when it incurred a net loss of RM4.4 million due to unrealised foreign exchange loss, higher raw material costs and stock write-offs.
Two of the seven listed snack food makers have coped better than their peers.
London Biscuits and its 19.72%-owned listed subsidiary Khee San have managed to maintain or grow profits in the recent quarters.
Khee San’s net profit for 1QFY2017 ended Sept 30 rose 7.98% to RM1.313 million from RM1.216 million a year ago, with revenue
rising 31.83% to RM36.5 million.
The group’s FY2016 net profit similarly rose 20.66% to RM4.91 million on the back of a 10.02% revenue increase to RM156.96 million.
But Khee San, which primarily manufactures sweets, expects another challenging year ahead and intends to mitigate the impact of
rising sugar prices and manage foreign exchange rates for its export business, which contributes about 47% to revenue.
London Biscuits, meanwhile, managed to maintain earnings in its 1QFY2017 ended Sept 30. Net profit for the period maintained year on year at RM5.21 million while revenue rose 1.85% to RM92.3 million.
London Biscuits’ core business is the manufacturing of cakes, sweets, candies, snack foods and potato chips. It derives over 30% of its sales from exports.
Its net profit for FY2016 increased 23.73% to RM18.59 million from RM15.02 million a year ago, while revenue grew 8.43% to RM436.51 million.
London Biscuits remains upbeat about demand for its products given its stable order book, but says it will improve operational efficiencies to address the impact of rising sugar and flour prices and foreign exchange fluctuations. And will be conservative in setting prices.
Snack stocks are down
Given the hangover of macroeconomic pressures, investors have shunned snack food counters in the last one year, beating down their prices over the last 12 months.
Recall that most of the seven snack food counters have enjoyed steady share price increases over the last five years. Nevertheless, six of the seven have ended 2016 lower (see table).
For example, Apollo ended 2016 at a one-year low of RM5.24, erasing gains made after the stock hit a five-year high of RM6.33 on Oct 17 last year.
Of the lot, Oriental Food saw the biggest decline in its share price, losing 42.63% after ending the year at RM1.37 from RM2.388 last January.
Only Hwa Tai Industries’ shares have clocked gains of about 13.4% over the year, closing at 46.5 sen on Dec 30 from 41 sen earlier in the year.
PMC’s stock hit a one-year low of 14.5 sen on Dec 27, and closed somewhat higher on Dec 30 at 15.5 sen.
This year should see a recovery in consumer sentiment, but this is not enough reason to cheer given the expected higher input costs that producers will have to manage, says AmInvestment Research.
The research house projects that private consumption will grow at a faster rate of 6.2% this year from the estimated 5.9% in 2016, but the research house notes that private consumption growth has averaged 7% over the 10-year period to 2015.
“A faster-than-expected pickup in consumer spending will disproportionately benefit consumer discretionary companies due to up-trading activities,” AmInvestment Research says in a Dec 23 note.
The research house warns that increases in numerous operating expenses and input costs, including utilities, labour and food costs, are expected to fully take effect going into FY2017.
“While higher costs have been accounted for in our assumptions, the spillover effect across value chains could pose a downside risk to our earnings estimates,” AmInvestment Research says.