Business  Profile

• A fast-growing distributor in East Malaysia. Kim Teck Cheong (KTC) was founded in 1938 and listed on ACE market of Bursa Malaysia on 25 Nov 2015. The company is headquartered in Kota Kinabalu, Sabah. It is engaged in the distribution of 3rd party brands (accounting for circa 95% of its total revenue) and in-house brands (circa 3%) of consumer packaged goods (CPG) in East Malaysia (EM). The company also manufactures its own bakery products (about 2%). Investment

Highlights

• Top tier distributor of CPG in EM. KTC currently distributes approximately 10,348 stock keeping units for 38 brands owners through its 19 distribution centres. Going forward, KTC is expanding its distribution operations and manufacturing operations in Sabah, Sarawak and Brunei.

• Impressive expansion plans. After its recent acquisitions of Popular Trading, Trans Paint and Grandtop Marketing as well as securing distribution contracts from SCGM’s plastic cup and Anakku Sabah, we expect management to continue its efforts to further strengthen its distribution arm in EM. Management guided that a few negotiations between KTC and MNCs/local well-known companies are on-going and the acquisitions/distribution contracts are expected to conclude by mid-2016. The series of acquisitions/distribution contracts, if successful, are expected to significantly boost its FY17 performance.

• Robust CPG market. According to Vital Factor Consulting, CPG market size in EM is estimated at circa RM6.8bn. For the time being, KTC only captured about 10% or RM290m of the distribution in Sabah and Labuan and less than 1% in Sarawak, indicating that there is ample growth for KTC to strengthen its distribution points and grow its market share.

• Sustainable margin. While KTC’s own brands of CPG (e.g. “Orie”, “Bamble” and “Creamos”) contributes circa 5% of total revenue, it offers higher GP margin of circa 28% as compared to the main contributor of 3rd party brands of about 13%. Coupled with the additional bakery production lines, we see strong cushion to protect KTC’s earnings margin from the downside.

Catalysts

• Sustained run-up in its impressive expansion plans; margin expansion from its own brands of CPG; extensive distribution network; and experienced management team.

Risks

• High labour and transportation costs; unexpected economic downturn; dependency on distribution of 3rd party brands of CPG; and delay in its on-going acquisitions/distribution contracts.

Forecasts

• We expect its top and bottom line to grow by 54.6% and 56.7% respectively in FY17, given its aggressive on-going expansion plans; robust CPG market size and extensive distribution network.

Rating

• /

Valuation

• We derive our TP of RM0.49, based on distribution industry peers’ average P/E of 15.3x, which is justifiable given its proven and established track record since its listing, future strong earnings growth; experienced management team and margin expansion due to initiatives in own brands of CPG.

Source: Hong Leong Investment Bank Research - 22 Mar 2016