• Established for more than 30 years, Sik Cheong Berhad is principally involved in therepackaging, marketing, and distribution of RBD palm olein oil products for itscustomers, comprising more than 500 per annum.

• For FY25-27f, we project the revenue to grow by 10.7-12.3% to RM89.4-109.6m,while its core net profit to increase by 9.8-14.1% to RM6.9-8.8m, supported byoverall expansion plans in Peninsular Malaysia and growing demand for its RBDpalm olein oil products.

• We ascribe a fair value of RM0.495 (upside of 83.3% against IPO price of RM0.27) for Sik Cheong. Our valuation is derived by pegging a forward P/E of 18x to the mid-FY26f EPS of 2.75 sen. We believe the forward P/E of 18x, which is a discount of 21-33% from the average P/E and average forward P/E of 27.0x and 22.8x of the GICS Consumer Staples Segment due to its smaller market capitalization.

Investment Highlights

Venturing into the distribution of Soybean Oil… Sik Cheong Berhad (SCB) has over 30 years of experience in the industry and a customer base of more than 500 per annum, comprising retailers, wholesalers, hotel, restaurant and catering operators, and food manufacturers, the group intends to expand its product range to include high oleic soybean oil. This new venture will provide SCB with an additional income stream by 2Q26 and reduce its reliance on the RBD palm olein oil segment, which contributed 99.1-99.6% to its total revenue during the FYEs under review.

…and enhancing its operational capacity in Factory No. 9. The group intends to rebuild Factory No. 9 into a 3-storey factory building with a total built-up area of approximately 18,000 sq ft. With the rebuilding of Factory No. 9, coupled with its existing packaging capacity at Factory No. 11, the group will increase its total built-up area by 88% to approximately 39,000 sq ft. This is significant as the current utilisation rate for repackaging activities and storage space is over 95%. Additionally, SCB will purchase and house (i) two packaging lines for high oleic soybean oil, (ii) a labelling machine, (iii) two inkjet printing machines for printing batch numbers and expiry dates on bottles, (iv) a receiving turntable, (v) three storage tanks, and (vi) other equipment such as forklifts, pallets, trucks, and a floor scrubber in Factory No. 9. The truck utilisation rate stood at over 97.55% as of FY24. The rebuilding of Factory No. 9, along with the installation and testing of the new machinery and equipment, is expected to be completed in 1Q26. High oleic soybean oil is estimated to contribute to SCB’s top and bottom lines after 2Q26.

Geographical expansion to reach new demand. As of LPD, SCB’s revenue has been predominantly generated from customers based in Kuala Lumpur and Selangor, accounting for 95-98%. Moving forward, the group intends to grow its revenue from existing and new customers based in other states in Malaysia, particularly Perak, Negeri Sembilan, Melaka, and Pahang, due to the proximity of these states to Kuala Lumpur and Selangor, where Factory No. 11 is located. This will allow the group to easily extend its sales reach and deliver products to these states.

Company Background

Through its wholly owned subsidiaries, SCB is principally involved in the repackaging, marketing, and distribution of RBD palm olein oil products. The group's main products are RBD palm olein cooking oil, which are sold under its in-house brands – “Sawit Emas” and “Vitamas” – or sold unbranded. The group also sells RBD palm olein lamp oil under its in-house brand, “Pingat Emas.”

Business overview

Repackaging, marketing and distribution of RBD palm olein oil products segments (99.6% of FY24’s revenue). This segment has always been the main driver for SCB’s topline. All of the group’s revenue is generated in Malaysia, with a majority of its products sold and delivered to customers based in Kuala Lumpur and Selangor. For the FYEs under review, revenue generated from customers based in Kuala Lumpur and Selangor comprised between 95.09% and 97.66% of SCB’s revenue. The group’s other customers are based in Negeri Sembilan, Johor, the Federal Territory of Putrajaya, Pahang, Perak, Sarawak, Melaka, and Terengganu.

Trading of third-party products (0.4% of FY24’s revenue). Upon requests from customers, the group will source third-party branded products (mainly margarine) for its customers in the retail, wholesale, hospitality, and food industries sector. As of the LPD, the group sourced and distributed “Adela,” “Pelangi,” and “Bunga Emas” margarine.

Financials

In FY24, SCB’s revenue surged to RM79.6m from RM42.6m in FY20, achieving a CAGR of 23.2%. The revenue increase is mainly due to an increase in total volume sold in non-subsidized palm olein oil products, in tandem with the rise in average price amid an increase in the average CPO price.

Project to grow at 10.7-12.3%. Moving forward into FY25-27f, we project the revenue to grow at 10.7-12.3% to RM89.4-RM109.6m, while projecting its core net profit to increase by 9.8-14.1% to RM6.9-RM8.8m, supported by the overall expansion plans in Peninsular Malaysia, and growing demand for its RBD palm olein oil products.

Valuations

We ascribe a fair value of RM0.495 (upside of 83.3% against IPO price of RM0.27) for Sik Cheong. Our valuation is derived by pegging a forward P/E of 18x to the midFY26f EPS of 2.75 sen. We believe the forward P/E of 18x, which is a discount of 21- 33% from the average P/E and average forward P/E of 27.0x and 22.8x of the GICS Consumer Staples Segment (Fig #9) due to its smaller market capitalization.

Investment risks

Any disruptions in packaging facility and business operations. Any prolonged disruptions in SCB’s operations may adversely affect the group production schedule and timely delivery of the products.

Any issue with the product’s regulations and compliance. Any changes in the regulations which result in stricter compliance requirements, the group operations may need to incur additional operating costs to comply with the new standards.

Presently dependent on a single product. Any challenges and/or declined faced in the RBD palm olein oil in the RBD palm olein oil industry my adversely impact SCB’s business operations and financial performance.

Dependent on Key senior management. Discontinuation of service of the key senior management may disrupt key decision making within SCB’s business operations.

Source: Mplus Research - 25 Jul 2024