This article first appeared in The Edge Financial Daily on June 13, 2018

CCK Consolidated Holdings Bhd
(June 12, 95.5 sen)
Maintain add with an unchanged target price (TP) of RM1.09: CCK Consolidated Holdings Bhd’s share price went ex-bonus issue on Monday following the issuance of 315.4 million new bonus shares. The bonus issue also came with one-for-two new warrants at a strike price of 90 sen.

We adjust our numbers to incorporate the enlarged share base of 630.7 million. Also, we include the RM284 million estimated warrant proceeds (assuming full conversion) as well as impute a fully diluted share base (946.1 million) into our sum-of-parts (SoP)-based valuation. Our adjusted SoP-based TP stands at RM1.09.

We gather from CCK’s management that the warrants’ proceeds will be earmarked for paying off its borrowings, future capital expenditure plans for its poultry and retail segments, and financing its working capital requirements which are set to increase in tandem with its expansion plans. In our view, these proceeds will allow the group to pursue merger and acquisition activities if the right opportunities arise.

CCK will continue to pursue expansion in the poultry and retail segments. Besides upgrading existing poultry farms, CCK plans to gradually increase its number of layer, broiler, and breeder farm in Kuching, Sarawak. This will provide sufficient supply to increase the daily output of its Kuching abattoir by 33.3% to 38,000-40,000 birds. It also plans to produce 240,000 eggs daily (currently: 200,000 eggs per day). In retail, CCK plans to open more outlets with four to five new ones planned for 2018.

We keep our “add” call, with a fully diluted SoP-based TP of RM1.09. We still value CCK’s business at 18.3 times calendar year 2019 (CY19) price-earnings ratio (PER), a 20% discount to our consumer sector weighted average CY19 PER, and input the cash from the assumed full conversion of all its warrants. We continue to like CCK for its strong earnings prospects, dominant position in East Malaysia through its network of 57 retail outlets, and robust demand for poultry products in East Malaysia. — CGSCIMB, June 11