PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 5 Jun 2020, 9:37 AM


CCK Consolidated - The Golden Egg?

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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, well-known for its solid business and defensive nature, was not spared from the frenzied selling either as its share price sank nearly 32% YTD. The stock is now trading at an unjustifiable forward FY20 PER of only 6.4x. 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 FY20-22 earnings forecasts. Maintain Outperform call with an unchanged TP of RM0.79 based on 14x FY20 EPS, giving a huge potential upside of 119%.

  • Expanding into bigger retail space. It currently runs 59 stores in East Malaysia, accounting for 80% of its retail segment. Each retail store ranges from 1,200sq ft to 4,000 sq ft in size, and can cater for up to 1,000 stock keeping units (SKUs). 50%-60% of its products are in-house processed chicken, table eggs and beef/lamb. 70% of its customer base is food and beverage (F&B) operators while the remainder are retailers. To cater for a wider range of grocery products, the Group is planning to open 2 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 RM1.5m while the second supermarket, which has a bigger retail space of 25,000 sq ft, will cost about RM2.5m. The supermarket can cater for up to 8,000 SKUs, which is 8x 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 1 Sarawak. The allocated capex for each store is about RM500,000. All-in, total capex for FY20 is about RM20m-RM25m.
  • Uninterrupted operation during the MCO period. 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 in 1QFY20 as consumers stock up poultry products amid the movement control order period. We also expect to see a surge in egg demand ahead of the Hari Raya and Harvest Festival celebrations in May.
  • Share buybacks. The recent dip in CCK’s share price has exposed deep value in the company and has pressed 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.
  • Trading at -1 standard deviation level. YTD, the company’s share price has fallen 32% to the current level of 36sen. It is also trading at an unwarranted forward PER of only 6.4x, >50% discount to the consumer sector’s average PER of 15x. The stock is also trading at -1 standard deviation to its long-term historical average. Given recent weaknesses in soybean (YTD: -5.5%) and corn prices (YTD: 10%) as well as solid demand for poultry products, we do not expect any downside risks to earnings this year.

Source: PublicInvest Research - 27 Mar 2020

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