Oriental Food Industries Holdings Bhd
(Nov 23, RM1.45)
Maintain hold with an unchanged target price (TP) of RM1.61: Core earnings are in line with expectations. Oriental Food Industries Holdings Bhd recorded a second quarter ended Sept 30, 2017 (2QFY18) core net profit of RM4.8 million (including foreign exchange [forex] loss of RM700,000 during the quarter).

This brings its first half of FY18 (1HFY18) core net profit to RM8.9 million, which is 10.1% higher year-on-year (y-o-y) and the results are within our forecast as it constitutes 46% of our full-year earnings estimate.

On a y-o-y basis, Oriental Food achieved a lower reported net profit in 2QFY18 (-20.4%) mainly due to higher marketing and promotional expenses coupled with the forex loss amid a better top line of +22%.

Also, we believe that the higher operating and administrative expenses were related to lower operational efficiency due to shortage of foreign labour and hiring costs in view of its expansion of production lines.

Excluding the impact of forex fluctuations, the group achieved a higher core net profit of 7.4%. Similarly, Oriental Food Industries’ 1HFY18 reported net profit was down by 20% y-o-y as it was affected by the above-mentioned reasons.

Having said that, the group managed to achieve a better core net profit of +10.1% y-o-y after excluding the forex factor.

On a quarter-on-quarter (q-o-q) basis, the higher core net earnings (+19%) were mainly attributable to tax incentives granted as well as deferred tax asset provision for certain temporary differences.

Oriental Food chalked up better export sales (Asia-Pacific: +34.4% y-o-y, +16% q-o-q; Others: +91% y-o-y, +65.6% q-o-q) as compared with local sales in this quarter (-25.2% y-o-y, -28.3% q-o-q).

Similarly, for 1H geographical breakdown on revenue, the export market (Asia-Pacific: +18.9%; Others: +36.5%) significantly outgrew local sales (-6.4%).

Despite the relatively high raw material costs and shortage of labour, the group still managed to perform well in its gross profit margin (2QFY18: +2.2 percentage points [ppts] y-o-y and q-o-q; 1H: +0.7ppts).

We envisage the group to deliver slightly better earnings in 2HFY18 underpinned by strong export sales and the introduction of its new biscuit product by the end of this year.

As usual, the group will announce dividends for every quarter of the year. It has proposed an interim dividend of one sen per share for this quarter.

We revise down our core net profit for the financial year ending March 31, 2018 by 6.7% to RM18.2 million after lowering our margin expectations. However, we keep our earnings forecast unchanged for FY19.

Maintain hold on Oriental Food with an unchanged TP of RM1.61, based on 17.7 times FY19 forecasted price-earnings (PE). The target price-earnings ratio (PER) is at the upcycle PE of the stock, that is +0.25 standard deviation above its three-year mean PE of 16.7 times. — JF Apex Securities Bhd, Nov 23