This article first appeared in The Edge Financial Daily on July 16, 2018

KUALA LUMPUR: CCK Consolidated Holdings Bhd, which has been recording a double-digit earnings growth in the last couple of financial years, is confident of repeating the feat for the current year ending Dec 31, 2018 (FY18).

“What we want to do is that not only grow the top line, but also the bottom line, by offering a higher-margin product mix as well as [targeting] retail customers that are [willing to] pay a higher margin,” group managing director John Tiong Chiong Hiiung told The Edge Financial Daily in an interview.

The Sabah and Sarawak-based poultry supply chain operator reported a 57.4% increase in net profit to RM28.8 million in FY17, from RM18.3 million in FY16. Revenue rose 10.15% to RM609.26 million from RM553.13 million.

For the first quarter of FY18, the group’s net profit almost doubled to RM12.41 million compared with the same period in FY17, on revenue of RM153.66 million. This translates into a profit margin of 8.08%. The group’s annual profit margin has seen a gradual rise from 2.72% in FY15 to 3.31% in FY16 and 4.73% in FY17.

Tiong attributed the rise in profit margin to a shift in the group’s focus to its retail business. He said CCK has been working on increasing the customer traffic in its retail stores over the last few years.

Tiong said the group wants to see the retail segment contribute half of its total revenue over the next three years, from 30% at present. The remaining half will come from sales to food and beverage (F&B) operators and corporate clients such as KFC and McDonald’s. Unlike other companies, which are focused on expanding production capacity, Tiong said CCK concentrates on expanding its retail stores which provide a higher profit margin.

The focus on household consumers, he said, was because the market condition in Sabah and Sarawak is different from the peninsula. “The market [in Sabah and Sarawak] is really not that big, so we can’t really emphasise on quantity,” he said, noting that poultry players there are rarely seen expanding their capacity.

Tiong said CCK has set aside RM15 million to RM20 million a year as capital expenditure (capex) for FY18 to FY20, which is to be funded mainly internally.

As at March 31, its cash and bank balances stood at RM28.25 million.

“This (capex) is to be used to replace some of the equipment, invest in retail outlets and build logistics facilities for our chilled and frozen products as well as warehouses or distribution,” said Tiong. He said money will only be used to expand its farms or abattoirs if it caters for the growing demand for poultry in its retail stores.

Anticipating higher demand for poultry supplies,  CCK has expanded its Kuching abattoir to raise its production from 30,000 to 40,000 birds a day. Presently, the group’s total supply is 50,000 to 55,000 birds daily.

Pointing out that the demand and supply of poultry in Sabah and Sarawak are “relatively stable”, Tiong said this was because there were very few players and the market is relatively smaller.

Looking ahead into the rest of 2018, Tiong expects chicken demand to continue to be stable in terms of volume. “I think chicken is essential and it’s still the cheapest protein around. So, I still believe that the consumption of chicken will still be on a continuous uptrend. So far, we have not seen a substitute for chicken. And chicken is still cheaper than other types of protein,” said Tiong.

Additionally, the group will be including vegetables and fruits in its product mix at all stores in the next few months. This is to gain more traction from household consumers.

Tiong said the group will continue to focus on Sabah and Sarawak. It has a total of 58 stores, with another 60 expected to open by the end of this year.

At the same time, however, the group is anticipating higher contribution from Indonesia. Currently, sales from Indonesia account for about 16% of total sales. “We are anticipating about 20% [sales from Indonesia] by year end or next year,” said Tiong.

With the new nugget line in Jakarta, which should see operations commencing in August, CCK is expecting an additional 5% contribution to its top line, starting FY19. The group’s other export markets are the Middle East, South Korea, Japan, China, Hong Kong and Australia.

CGSCIMB Research analyst Walter Aw is forecasting CCK’s net profit to be at RM36.07 million in FY18 and RM40.65 million in FY19. He expects revenue to be at RM699.1 million and RM755.9 million in FY18 and FY19 respectively. The research house retained its “buy” call on CCK shares with a target price of RM1.09. CGSCIMB is the only research house that has coverage of CCK.

The stock has been on an upward trend since 2016, closing at 88 sen last Friday, with a market capitalisation of RM551.9 million. Over the past one year, the stock has doubled in value from 45 sen.