CCK Consolidated Holdings Bhd
(March 27, 38 sen)
Maintain outperform with an unchanged target price of 79 sen: In line with the rout in global equity markets, most local stocks have also seen sharp declines in share prices over the last two weeks due to the mounting concerns over the Covid-19 pandemic. CCK Consolidated Holdings Bhd, well-known for its solid business and defensive nature, was not spared from the frenzied selling either as its share price sank nearly 32% year to date. The stock is now trading at an unjustifiable forward financial year 2020 (FY20) price-earnings ratio of only 6.4 times. We suggest investors take a look at CCK again given its: i) uninterrupted business during the movement control order (MCO) period; ii) recession-proof business; and iii) new earnings contribution from the two supermarkets in Kuching and Kota Kinabalu, which has not been imputed in our FY20-FY22 earnings forecasts.
It currently runs 59 stores in East Malaysia, accounting for 80% of its retail segment. Each retail store ranges from 1,200 sq ft (111.48 sq m) 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 in-house processed chicken, table eggs and beef/lamb. Seventy per cent of its customer base is 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, this year. 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 supermarkets can cater for up to 8,000 SKUs, which is eight times larger than the retail store. It is expected to break even within a year. The group also plans to open three more retail stores; two in Sabah and one in Sarawak. The allocated capital expenditure (capex) for each store is about RM500,000. All-in, total capex for FY20 is about RM20 million-RM25 million.
We understand that the company’s operations are not affected given that its business falls under the “essential” sector. Instead, we expect to see robust sales for the first quarter of FY20 (1QFY20) as consumers stock up poultry products amid the MCO period. We also expect to see a surge in egg demand ahead of the Hari Raya and Harvest Festival celebrations in May.
The recent dip in CCK’s share price has exposed deep value in the company and has pressed the management into action, with about 400,000 shares bought back thus far. Meanwhile, some of the company’s directors have also been acquiring additional shares in the open market. — PublicInvest Research, March 27