CCK’s 1QFY21 net profit fell by 25.1% YoY to RM6.1m, as the Poultry segment slipped into the red given the increasing raw material cost. Core net profit stood at RM7.6m, after adjusting for one-off items amounting to RM1.6m. Results came in within our and consensus expectations, accounting for 23% and 21% of our full-year forecast respectively. We tweak our earnings forecast for FY21-23F lower by c.1% due to housekeeping changes. We reiterate our positive view on CCK, largely driven by the expansion of new retail outlets and contribution from the Indonesian market. Our Outperform call on CCK is maintained, with a higher TP of RM0.77 (from RM0.73) based on 14x PE multiple as we roll over our valuation base year to FY22F EPS.

• 1QFY21 revenue grew by 1.7% YoY to RM163.7m due to stronger sales from the retail segment which cushioned the decline in other operating segments. The stronger contribution from the retail segment were mainly attributable to the opening of new retail stores (2 CCKLocal supermarkets and 4 CCK Freshmart), and stronger contribution from its processed food segment in Indonesia (17.7% YoY). As of 1QFY21, CCK operates a total of 68 stores as compared to 62 stores in 1QFY20. On the flip side, food service segment revenue declined by 62.3% YoY as school operations in rural areas and northern zones of Sarawak have been affected by the rise in Covid-19 positive cases.

• 1Q core net profit fell by 6.9% YoY to RM7.6m, dragged by the Poultry segment which recorded an operating loss of RM2.2m given the increase in corn and soybean meal prices globally, leading to a rise in feed costs. On a bright side, management plans to pass on the cost inflation by gradually raising selling prices across the specialized chicken products. Retail segment earnings increased by 24.2% YoY to RM9.1m, as EBIT margins improved (1QFY21: 6.7% vs 1QFY20: 5.8%) likely due to better economies of scale from existing and new outlets. Meanwhile, earnings contribution from its 27.2% owned animal feed distributor, Sarawak Gold Coin SB declined marginally to RM1.4m.

• Outlook. We understand that CCK is looking to expand its retail network, by adding another 5 retail outlets (4 CCK Freshmart and 1 CCKLocal supermarket), to bring its total store count to 73 by CY2021. In addition, the Indonesian market remains a key growth driver, as in 4QFY20 CCK added a new factory in Pontianak to cater for the growing demand for its products. The new factory consists of a coldroom, chicken abattoir, downline food processing plant and logistics centre. While the rising raw material cost could potentially affect CCK’s margins, we are still optimistic on CCK’s outlook nonetheless, as the group plans to mitigate the cost pressure by gradually increasing selling prices and to achieve better economies of scale due to organic growth of chain stores.

Source: PublicInvest Research - 27 May 2021