Price: RM1.45
Fair Value: RM1.80
Recommendation: UNRATED
· We recently visited Oriental Food Industries Holdings Bhd (OFIH) in Melaka and came away with the following key takeaways.
· Market leader in snack foods and confectionery products. OFIH manufactures snacks, potato snacks, wafers and confectionery products that are sold under the brands Fudo, Jacker, Rota, Oriental and Super Ring. Approximately half of the company’s FY09 revenue was derived from exports and the company expects the proportion of foreign sales to increase moving forward.
· FY09 net profit more than doubled YoY to RM9.8m even though revenue declined by 5% due to the global economic slowdown. This was mainly due to lower raw material prices, strengthening of the US Dollar and improvement in production efficiency as a result of internal initiatives.
· Capacity expansion to drive double-digit earnings growth in FY10, with the addition of new potato crisp and wafer lines in CY09, as well as moderation in input costs and introduction of new products. We anticipate that 2HFY10 earnings will be stronger than 1HFY10 due to festive seasonality. We have forecasted FY10 net profit growth of 10% to RM10.7m.
· Potentially higher FY10E dividend payout expected. OFIH paid out an interim dividend of 2.0 sen for the first time in 1QFY10. Given the company’s strong free cash flow (of RM11.5m at end-FY09) and minimal capex requirement (estimated RM4-5m in FY10) the company could possibly pay out at least 8.0 sen DPS this year, translating to a FY10 dividend yield of 6%.
· Currently trading at 8.2x FY10 PER, that is lower than the domestic food and beverage industry FY10 PER average of 15.1x. Other indicators of OFIH being undervalued are that its share price now is trading below its own 5-year historical average PER of 12.1x and NTA/share of RM1.80 (at end-June 2010). Indicative fair value of RM1.80 represents a potential 24% upside.
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