We see strong recovery in the company‟s prospects after having suffered from a double whammy in recent times due to a steep decline in egg prices and an increase in feedstock cost due to unfavourable foreign exchange movements and higher corn and soymeal prices. We like the company for i) being an integrated poultry player, ii) its sole focus on East Malaysia, iii) its continuous expansion in Malaysia and Indonesia‟s retail segments and iv) favourable raw material and poultry price movements. We initiate on CCK Consolidated (CCK) with an Outperform call and TP of RM0.88 based on 14X FY20 PER. We think that current valuations are unjustifiable given the positive industry sentiment.

• Background. Established in 1996, CCK has become a fully integrated poultry player encompassing feed mill, hatchery, breeder, broiler, layer, slaughtering house and retailing, with all its core chicken products sourced internally. Today, it has a broiler production of 1.5m birds/mth and table egg production capacity of 250,000 eggs/day. Its abattoir, which processes 50,000-55,000 birds/day, is the only poultry abattoir in Sarawak with a HACCP certification from the Malaysian government and has also received the Halal certification by the Islamic Development Department of Malaysia and Sarawak Islamic Council, allowing the Group to supply its chicken products to the local and international markets.

• Riding on niche market position. Being away from the crowded poultry markets in Peninsular Malaysia gives the company a solid market position and better bargaining power. It has a total of 56 retail stores, with another 6 expected to be opened by end-2019. In Indonesia, it will continue with its push by increasing the sausage production in Pontianak and Jakarta. The recent commencement of its new nugget line in Jakarta is set to help contribute another double-digit sales growth for the next 2 years.

• Less exposure to fluctuation in poultry prices. Being an integrated poultry player, it allows the company to fetch better profit margins with less middle-men involved. The company has more stabilized margins and more competitive price advantage, as it has a full control over the retail pricing, which helps reduce its exposure to the fluctuation in poultry prices.

• Poised to see stronger earnings growth. CCK is set to ride on the gains from the stronger sales growth backed by the i) expansion of retail stores in East Malaysia ii) the commissioning of a new nugget production line in Indonesia and iii) stronger egg and chicken prices due to tight supplies in local market. In addition, a recent slump in feedstock cost, which mainly consists of soymeal and corn as well as strengthening of Malaysia Ringgit will help ease cost pressures. We expect sales growth of 7%-9% with an improved gross profit margin of 20%-21% for FY19-21. This translates into an earnings growth of 12%-15% for the next 3 years.

Source: PublicInvest Research - 13 Feb 2019