SDS: Bakery Group Initiates Coverage with Hold Rating Amid Strategic Expansion and Cost Focus

TA Securities has initiated coverage on a Johor-based bakery manufacturer, assigning a Hold recommendation with a target price of RM0.85 per share. The company, which specializes in bakery products and F&B outlets, recorded resilient sales growth in FY25 but saw its core profit margin contract due to operational adjustments and investments.

Performance Review

For FY25, the company achieved sales growth of 6.7% year-on-year, reaching RM345.7 million. This growth was underpinned by strategic retail network expansion and the scaling up of its wholesale delivery fleet. Gross profit margin remained stable at 34.2%, effectively cushioning input cost pressures through timely price adjustments implemented earlier in the year. However, the core profit after tax (PAT) margin experienced a contraction of 0.8 percentage points, settling at 9.4%. This dip was primarily attributed to elevated selling and distribution expenses, including temporarily inflated fixed operating costs resulting from the restructuring of newly acquired delivery fleets in the second half of FY25.

Challenges and Operational Focus

The report highlights several prevailing challenges for the group. These include rising operational costs stemming from higher minimum wages, the inclusion of Sales and Service Tax (SST) on rental and leasing services from July 2025, and persistent uncertainties in consumer sentiment. In response to this backdrop, the company is prioritizing sales productivity per outlet and delivery efficiency in the first half of FY26. Consequently, it plans to defer certain expansion initiatives to the second half of the year, aiming to maintain its core PAT margin at a steady 9.4% in FY26. Efforts to enhance operational efficiency through delivery fleet consolidation, reduced wastage, and longer shelf-life product introductions are expected to support margins.

Future Outlook and Growth Drivers

Looking beyond FY26, TA Securities forecasts robust core earnings growth of 16.1% and 10.5% for FY27 and FY28, respectively. This projected growth is expected to be fueled by an expanding customer base, particularly with planned entry into the Central region, the addition of approximately four new F&B outlets annually, and improvements in product variety aimed at reducing product return rates. Furthermore, the company is strategically positioned to benefit from the Johor-Singapore Special Economic Zone (JS-SEZ) initiative, which is anticipated to drive cross-border sales growth. The company also maintains a solid financial footing, boasting a net cash position of RM23.3 million as of FY25.

Valuation and Recommendation

TA Securities values the company at RM0.85 per share, based on a target PE of 12x CY26 EPS. This valuation incorporates a 20% discount compared to its direct Asian peers, reflecting the company’s relatively smaller market capitalization and its exposure to operational risks. Despite demonstrating resilient margins and steady expansion, the firm’s initiation of coverage is set at a HOLD recommendation, advising a cautious stance given the factors mentioned.