(July 7, RM3.35)
Reiterate outperform at RM3.35 with higher target price of RM3.76 (from RM3.63): We reiterate our outperform and revise upwards our target price to RM3.76 (previously RM3.63) based on 36.5 sen FY2011 EPS and PER of 10.3 times as we tweaked our net earnings by 4.5% for FY2010 and 3.6% for FY2011.
We believe Mamee-Double Decker (MDD)’s bottom line will improve further, benefiting from (i) strong demand for its new and existing products, in particular the snack segments; (ii) economies of scale which diluted its advertising and promotion cost; and (iii) net cash.
The removal of the subsidy on raw materials like sugar and flour is expected to have a minimal impact on MDD’s production. The reason being, (i) MDD does not use subsidised flour; and (ii) the rise in the cost of sugar will have a minimal effect on its beverage segment.
MDD’s plan to achieve total sales of RM1 billion within five years is viable, backed by (i) a strong brand name and heavy advertising and promotion (A&P) of its products (MDD spends roughly 9% of revenue on A&P); (ii) increasing global market reach with Australia contributing to revenue; (iii) strong support to/by its local distributor; and (iv) constant new product launches (Mr Potato Rice Crisps and Mee Indonesia) to spur sales. MDD currently tops the snack segment in Peninsular Malaysia, with about 31.1% of the market share.
Its closest competitor, Kraft Food, enjoys 23.3%. MDD’s Mr Potato snack has been in this position since January 2009, with 7.5% market share as at April 2009. Its main competitors, Pringles has a 4.3% market share and Jacker 2.7%.
The Mr Potato production lines are currently operating at near full capacity of 95%, higher than their usual 85%, in view of the overwhelming demand for the new Mr Potato Rice Crisps. The fourth production line in the Subang plant is expected to be up and running this month, while the automation of one of MDD’s existing lines is well on track. This new line will be used to produce Mr Potato Rice Crisps to meet the higher-than-expected local demand and for the product launch in Singapore in 2HFY2010.
MDD’s beverage, Cheers, is successful in the northern region and east coast. The management now plans to concentrate on the southern end. Its focus will be coffee shops and retailers as a way to compete on a more level playing field. We expect 3QFY2010 to have a more significant contribution in view of the Hari Raya Aidilfitri festive season which tends to amplify beverages sales.
MDD recently bought a three-acre tract of land at RM60 per sq ft in Subang to accommodate its growing need for a warehouse. The facility will act as a collection point prior to the shipment of its goods. — Inter-Pacific Research, July 7
This article appeared in The Edge Financial Daily, July 8, 2010.
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