KUCHING: Analysts say Apollo Food Holdings Bhd’s (Apollo) share prices is best fairly valued at RM5.01 per share due to lack of earnings prospects.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Apollo reported its first half of 2017 (1H17) revenue of RM98.1 million and earnings of RM10 million.
“The weaker top line performance was due to lower sales in both local and overseas markets,” Kenanga Research said.
“In particular, we believe that the lower turnover from the overseas market was mainly attributed to a change in policy in Indonesia – a market that accounts for circa 80 per cent of Apollo’s exports.”
The increase in costs of raw materials, coupled with lower foreign exchange gains, narrowed Apollo’s first half of 2017 (1H17) net profit margin to 10.2 per cent versus 17.9 per cent a year ago.
With two of the three major raw material prices having risen sharply, Kenanga Research saw little chance for gross margins to rebound in the coming quarters.
“Although flour prices have been fairly stable, other key raw materials, such as crude palm oil and sugar have seen their prices climb 34 per cent year on year (y-o-y) and 30 per cent y-o-y, respectively.
“Material cost pass-through mechanism has been of little help, particularly in the Indonesian market where consumers are more price sensitive,” it said.
As such, the research arm had assumed gross margins to compress to 22 per cent in financial year 2017 (FY17), down 5.4 percentage points (ppt), before stabilising at 23 per cent for FY18.
Meanwhile, Apollo’s large cash pile provides ample room for capital expenditure (capex), which Kenanga Research saw as necessary given the current number of aging machineries and high dependency on manpower.
“Apollo has already earmarked the Larkin site (Johor) for future expansion of newer and modern production machineries that allow for higher output and more automation,” it said.
However, with uncertainty surrounding the timing of acquiring the necessary approvals and the need for hire a large number of support staffs, the research arm did not expect any contribution from these new capacities within the next one to two years.
On dividends, Kenanga Research had estimated it to come in at 19 to 21 sen — implying a dividend yield of 3.8 to 4.2 per cent — based on an 80 per cent pay-out ratio for FY17-18E (FY16: 80 per cent).
“Nevertheless, we would not be surprised by a higher pay-out given Apollo’s large cash hoard,” it said.
The research arm also saw scope for a bonus issue, given the tight liquidity and high retained earnings of RM184.2 million against a share capital of just RM80 million.
Overall, Kenanga Research projected the group will record RM18.9 million (up 36.5 per cent y-o-y) net profit in FY17 before recovering to RM20.8 million (up 9.9 per cent) in FY18, underpinned by a modest recovery in overseas sales.
At the same time, Kenanga Research brought closure to its previous “trading buy” recommendation, and believed that with the lack of earnings prospects, Apollo’s share price is at best fairly valued at current levels of RM5.01 per share based on 19.3-fold FY18E earnings per share (EPS) (13.2-fold ex-cash).
“This is in-line with the valuations for similar sized companies,” the research arm said, noting that for instance, Oriental Food Industries Holdings Bhd is currently trading at 19.4-fold price earnings (PE).