Affin Hwang Investment Bank has maintained a “HOLD” rating on Rhone Ma Holdings with an unchanged 12-month price target of RM0.75 based on 12x 2023E PER.
6M22 core net profit grew by 19% yoy on higher revenue, within expectations. Rhone Ma booked in higher 6M22 revenue of RM93.1m (+22% yoy), driven by higher contributions from both the animal health and food ingredient businesses. Stronger demand for companion animal products lifted animal health’s revenue by 16% yoy to RM70.4m while the reopening of more economic sectors spurred the sales of food ingredient business (+52% yoy to RM18.2m). With a stable 6M22 EBITDA margin of 12.5% (6M21: 12.6%), Rhone Ma recoded 6M22 core net profit of RM6.2m (+19% yoy).
Rising product costs hit 2Q22 earnings, results were below expectations. Notwithstanding a higher revenue of RM46.8m (+1.3% qoq), Rhone Ma’s 2Q22 core net profit fell by 22% qoq to RM2.7m (+20% yoy) due to rising product costs that eroded its EBITDA margin to 11.8% (-1.5 ppt qoq). All in, the results were below the street’s expectations – Rhone Ma’s 6M22 core profit accounted for 46-47% of the street’s full year earnings forecasts due to weaker-than-expected profit margins. Moving into 2H22, it is expected its profit margins to remain tight, in view of the weak Ringgit, inflationary pressure and rising product costs.
Cutting 2022E EPS by 6%, maintain HOLD. Affin Hwang IB cut its 2022E EPS forecasts by 6% after lowering EBITDA margin forecast to 12.3% – the margin squeeze is happening earlier than its earlier expectations. Whilst its 2023-24E EPS forecasts are largely unchanged, as the research house has already incorporated lower EBITDA margin assumptions of 11.9%-12.0%. Maintain HOLD with an unchanged 12-month price target of RM0.75, based on 12x 2023E PER. The research house likes Rhone Ma’s proactive management team, extensive product portfolio, in-house R&D capability, expanding manufacturing capacity and positive earnings outlook. On the flip side, there is limited growth prospects in Malaysia’s mature chicken and swine industries, are neutral on the dairy/milk processing business expansion, and note that its distribution business comes with inherent supplier risk.
Key risks
Upside risks are stronger-than-expected earnings and faster/profitable expansion of dairy business.
Meanwhile, downside risks include weaker earnings, stiff competition in the animal health business, operational challenges at the dairy business, start-up/construction risks of the milk-processing plant.
