This article first appeared in The Edge Financial Daily on July 9, 2018
CCK Consolidated Holdings Bhd
(July 6, 90 sen)
Maintain add with an unchanged target price (TP) of RM1.09: There’s 82 fund managers and analysts during CIMB Consumer Day last Wednesday. CCK Consolidated Holdings Bhd participated in the event and was represented by its managing director John Tiong Chiong Hiiung. There were no surprises from the meeting, with most discussions centred on: i) CCK Consolidated’s background and operations; ii) expansion plans across its integrated supply chain, especially in the retail segment; and iii) the supply-demand dynamics of poultry products in East Malaysia. Demand for poultry products remains robust in Sabah and Sarawak.
CCK Consolidated believes the demand-supply dynamics of the Sabah and Sarawak poultry sector remains healthy. It currently supplies an estimated 35% of Sarawak’s total broiler volume, and believes that competition in the sector should ease moving forward. This is due to expectations of more market consolidation as smaller players are less competitive due to lower economies of scale. Meanwhile, demand for its poultry products should continue to rise, driven by: i) higher demand from more food and beverage customers, including global fast-food operators; ii) wider product offerings; and iii) the opening of more retail outlets.
On the retail front, CCK Consolidated has indicated that it plans to open 13 to 14 stores over the next two to three years. We gather that these outlets are likely to be smaller in size (compared with its current ones) and need less capital expenditure (below RM300,000). These outlets will mainly be opened in smaller towns in Sabah and Sarawak where they will face minimal competition and serve a sizeable populace. CCK Consolidated aims to gradually refurbish some of its larger existing outlets to sport a fresher look to attract younger shoppers. These outlets will offer more products with higher margins, such as ready-to-eat meals, fruits and vegetables.
On its upcoming second quarter of financial year 2018 (2QFY18) results (likely to be released at end-August), we expect CCK Consolidated to report weaker quarter-on-quarter results. This is on the back of: i) the recent strengthening of the US dollar/ringgit exchange rate (which will lead to higher feedstock prices); ii) the Ramadan fasting period falling in 2QFY18; and iii) weaker egg and broiler prices due to pricing competition. Nevertheless, we expect pricing competition to abate beginning 3QFY18, along with a recovery in poultry product prices. Overall, we estimate that CCK Consolidated will record a 15.3% core net profit growth in FY18.
Our FY18 to FY20 earnings per share forecasts are intact. We also retain our “add” call and sum-of-parts-based TP of RM1.09. We continue to peg the stock at 18.3 times price-earnings ratio for calendar year 2019 forecast (CY19F) (20% discount to our consumer-sector targeted CY19F weighted average of 22.8 times). Stronger-than-expected prices of poultry products or higher sales volume could further rerate the stock. Downside risks to our call are a sharp increase in feedstock prices and a stronger US dollar/ringgit exchange rate. — CGSCIMB Research, July 5