This article first appeared in The Edge Malaysia Weekly on May 22, 2017 - May 28, 2017

THE rise in Penang-based poultry player CAB Cakaran Bhd’s share price since mid-March has got investors wondering if there is more upside to come.

“Assuming 30% earnings growth for the current financial year, the stock is only trading at around 14 times. If you were to compare it with peers such as QL Resources Bhd and Lay Hong Bhd — both are trading at 30 times forward — the upside of CAB Cakaran looks even more appealing,” a market observer says.

Inani Rozidin, an analyst with AllianceDBS Research, agrees. She says inorganic growth drivers such as the memorandum of understanding (MoU) signed with KMP Pte Ltd, owned by Indonesia’s Salim Group, and the purchase of breeder farms from Sinmah Breeders Sdn Bhd (SBSB), a subsidiary of Farm’s Best Bhd, will continue to underpin CAB Cakaran’s growth momentum of the last five years.

“Its strategy is aimed at growth. If you look at its historical earnings, it has been growing its top line. I think at the moment, its intention is to keep doing that by expanding capacity. The completion of the acquisition of SBSB will further expand the company’s broiler production capacity, supported by the increase in its breeding capacity from 510,000 to 940,000 parent stock,” she says.

“CAB Cakaran’s production capacity last year was about five million birds per month. With the completion of the acquisition, we think that its full broiler production capacity could reach seven million birds per month.”

She also points to CAB Cakaran’s low net profit margin of 2.14% as another area management could improve on.

Inani, however, notes that once CAB Cakaran has expanded its capacity to a certain level, economies of scale will kick in and farm enhancements will lead to cost savings, thus improving the net profit margin. She expects net margins to rise in FY2017 and FY2018 to 2.6% and 3.3% respectively.

Besides that, the MoU signed with Salim Group to set up a 90:10 joint venture (JV), with an option to increase CAB Cakaran’s stake to 30% in the next three years after the initial set-up, is another development investors are monitoring closely. The JV has set a target to produce five million birds per month in three years to be used internally by Salim Group for the production of processed food.

Year to date, CAB Cakaran’s share price has risen 85.7%, making it one of the top 10 performers among listed companies with a market capitalisation of RM500 million and above.

A fund manager says a lot of the catalysts have already been priced in, although some of the developments have yet to materialise, including the JV with Salim Group.

“The market, in general, has gone up quite significantly, more so for CAB Cakaran. The question is, what if some of these anticipated developments fall through or are delayed further? It will definitely hurt the stock’s price if these expectations are not met. Given the surge in its share price, it makes investment sense to take profit,” he says.

Adding to the sense of cautiousness is CAB Cakaran’s announcement of an extension in the validity period for the MoU signed with KMP to the end of the year.

However, a source familiar with the matter says an announcement on the progress of the JV is expected in the next two to three months.

Besides that, CAB Cakaran recently announced that its 51%-owned subsidiary, Tong Huat Poultry Processing Factory Pte Ltd, has accepted the exercise of the option to buy a factory for S$6.1 million (RM18.7 million).

When contacted, Christopher Chuah, the managing director of CAB Cakaran, says the factory is currently vacant and will be used by Tong Huat to process and pack meat products in view of the increase in its production capacity. The acquisition of the factory is a continuation of the group’s capacity expansion.

Despite its aggressive expansion, CAB Cakaran’s balance sheet remains stable, with its net debt-to-equity ratio at 0.5 to 0.6 times.

CAB Cakaran is also in talks with Felcra Food Industries Sdn Bhd to explore the possibility of collaboration in agriculture and aquaculture business activities. Felcra Food Industries is a wholly-owned subsidiary of the Federal Land Consolidation and Rehabilitation Authority (FELCRA) and its objective is to develop the rural sector by helping communities participate in economic activities and improve their standard of living.

“Given Felcra Food Industries’ background and CAB Cakaran’s core business, it’s likely to be some sort of agreement in relation to contract farming. As CAB Cakaran continues to expand its capacity, this could be a good strategy that won’t put more burden on its balance sheet,” an analyst says.

Following the strong performance  of its share price,  CAB Cakaran’s board has proposed a share split and bonus issue. The proposed share split involves the subdivision of every two existing ordinary shares in CAB Cakaran into five, while the proposed bonus issue is for one share for every four split shares held.

With a free float of 41.4%, the proposed exercise is expected to enhance the trading liquidity of CAB Cakaran’s shares.

For its first quarter ended Dec 31, 2016 (1QFY2017), the group posted a net profit of RM7.3 million, compared to a net loss of RM4.2 million a year ago. Revenue grew 37.8% to RM349.5 million.

With the first quarter traditionally being a weaker one for the group, the strong growth recorded during that period indicates continued momentum from its record revenue in the previous financial year.

In the second quarter last year (2QFY2016), the group saw its revenue and net profit grow 28.4% and 147.3% respectively. Based on IndexMundi data, the monthly poultry price from January to March rose 9% to RM5.23 on average from October to December last year. This is likely to boost CAB Cakaran’s 2QFY2017 results, but it will be interesting to see if it can meet the expectations of its investors.

CAB Cakaran is likely to announce its 2QFY2017 financial results on May 25,  according to Bloomberg data.

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