This article first appeared in The Edge Financial Daily on December 13, 2019

CCK Consolidated Holdings Bhd
(Dec 12, 55 sen)
Maintain outperform with an unchanged target price (TP) of 79 sen: We came away from our meeting with CCK Consolidated Holdings Bhd’s management last week with a more positive outlook for the company’s prospects. The group is planning to venture into the supermarket business in Kuching and Kota Kinabalu next year with an estimated capital expenditure (capex) of RM4 million. This is not a new venture given that the group already has vast experience in running 59 retail stores throughout East Malaysia. Expanding downstream is also one of the ways to lift the group’s margins and reduce its exposure to volatility in poultry product prices. We reiterate our “outperform” call with an unchanged TP of 79 sen based on 14 times forecasted financial year 2020 (FY20) earnings per share.

The group’s Indonesian operations will continue to be its key growth driver. Its Indonesian business, which produces sausages and nuggets, makes up 16% of group sales while contributing about 20% of the group’s bottom line. The management has set a target of a 25% bottom-line contribution in the long term.

Each of the group’s 59 retail stores in East Malaysia ranges from 1,200 sq ft to 4,000 sq ft in size, and can cater for up to 1,000 stock-keeping units (SKUs). Fifty per cent to 60% of its products are its in-house processed chicken, table eggs and beef/lamb. Seventy per cent of its customer base are food and beverage operators, while the remainder are retailers. To cater for a wider range of grocery products, the group is planning to open two supermarkets, one each in Kuching and Kota Kinabalu. The first supermarket, which will have a retail space of 14,000 sq ft, is expected to cost RM1.5 million, while the second supermarket, which has a bigger retail space of 25,000 sq ft, will cost about RM2.5 million. The supermarket can cater for up to 8,000 SKUs, eight times more than a retail store. It is expected to break even within a year. The group is also planning to open three retail stores next year, two in Sabah and one in Sarawak. The allocated capex for each store is about RM500,000. All in, the total capex for FY20 is about RM20 million to RM25 million.

Despite aggressively growing its retail market business, the group has guided that it will also expand its upstream segment on a gradual basis. The fourth quarter is seasonally the second strongest quarter as demand for poultry products picks up ahead of Christmas and Chinese New Year celebrations. The group’s earnings for the cumulative nine months of FY19 met 85% of our full-year projection and it is likely to exceed our full-year estimate. — PublicInvest Research, Dec 12