• FY2017 Revenue and Adjusted PATMI was c.6% lower than our full year expectations; due to persistently challenging environment in Malaysia and Singapore
• Vinamilk to provide a further uplift to FY18e EBIT and cushion against the subdue Malaysia and Singapore markets
• Upgraded to “Accumulate” with higher SOTP-derived TP of S$2.83 (previously S$2.52)

The positives

• Gaining stronger foothold in Vietnam via Vinamilk (Vietnam Dairy Products Joint Stock Company). With the 18.74% stakes in Vinamilk and two representatives on Vinamilk’s board, Vinamilk has been reclassified as an associate company with effect from 16 Apr-17. Vinamilk contributed approximately S$84mn or 47% of FY17 EBIT – S$51mn as share of associates profit for the five-and-on-half-months for this financial year, and S$33mn as dividend income.

An exceptional gain of $1,177.6mn was also recorded from the realisation of fair value adjustment reserve upon the reclassification of Vinamilk, boosting the FY17 PATMI to $1,283.1mn.

• Dairies continued to deliver strong growth, underpinned by strong Dairies Thailand performance, as well as the significant increase in contribution from Vinamilk.
• Losses for Publishing and Printing (“P&P”) narrowed by $0.7mn to $4.5mn on improved printing plant efficiencies and cost rationalisation measures. Print returned to profitability after a few years of losses.
• Remains committed to its dividend policy, i.e. payout ratio of at least 50% of Group attributable profit before fair value adjustment and exceptional items. FY17 total dividend at 4.5 cents, same as last year.

The negatives

• Group earnings were dampened by (a) higher finance cost; (b) losses in Beverages and P&P; and (c) brand investments in New Markets. The Group has turned into net debt position (with gearing at 5.3%) on borrowings to finance the acquisition of Vinamilk shares.

• Persistent challenging environment in Malaysia: rising input costs, cautious spending, intensified competition, and weaker MYR against SGD. In response to the aggressive competition, the Group offers different price points to cater to the costs conscious consumers, including the launch of 400ml bottle at RM1.50; while the existing 500ml bottle at the price range of RM1.80 – RM2.00 continues to appeal to value-seeking consumer.

Outlook

We are cautiously optimistic on the trading environment in Malaysia, Singapore and Thailand. Singapore and Thailand’s Food and Beverages markets have showed signs of improvement. On the other hand, margin pressure in Malaysia should ease slightly, on the back of a more favourable sugar price. The contract with the Malaysian government which fixed the sugar prices at RM2,800/tonne (higher than the market price) will end in Dec-17. Moving forward, the Group will source is sugar needs at a more favourable market price at about RM2,300-RM2,400/tonne.

The Group will continue to reinvest its earnings into brand building efforts in New Markets, namely Myanmar, Vietnam and Indonesia, adding new avenues for growth.

Upgraded to “Accumulate” with higher sum-of-parts derived TP of S$2.83 (previously S$2.52)

We trimmed FY17e revenue by 6% on as we expect subdued demand in Malaysia to extend into FY18e. The upcoming general election in Malaysia which could further weigh against consumer sentiment and Ringgit’s strength.

Nonetheless, we adjusted FY18e earnings upward by c.59%, on the back of (a) continuous support from Dairies; (b) benefits from restructuring initiatives to realize; and (c) higher profit sharing from Vinamilk with full 12 months contribution in FY18e. Vinamilk to continue to drive over 40% of the Group’s EBIT moving forward.