• Business profile - Kim Teck Cheong (KTC) 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%). We initiated KTC as a GEMPICKS idea on 22 March 2016.
• Investment highlight – After 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 East Malaysia. Management guided that a few negotiations between KTC and MNCs/local well-known companies are in the midst of completion 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.

• Catalysts – We like KTC mainly due to its sustained run-up in its impressive expansion plans; margin expansion from its own brands of CPG; extensive distribution network; and experienced management team.
• Valuation - We derive our TP of RM0.49, based on distribution industry peers’ average P/E of 15.2x, 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.
• From technical view point, after hitting an all-time high of RM0.475 on 6 Jan 2016, share price has been in profit-taking mode. Recent share price retracement is grossly oversold based on hourly and daily charts and reading from hourly and daily MACD, RSI and Stochastics . The stock is expected to stage a strong imminent recovery in share price amid bottoming-up oscillators. Hence, we reiterate our BUY call on KTC, with technical upside resistances of RM0.39, RM0.42 and RM0.44 (long-term objective). Immediate supports are at RM0.355 and RM0.345. Cut loss below RM0.335.
• Attractive risk to reward ratio with 22% upside against 6.9% downside. We see a good risk to reward ratio for investor with a theoretical entry price of RM0.36 given that the downside to the cut loss zone of RM0.335 is 2.5 sen (-6.9%) while the upside to the LT target of RM0.44 is 8 sen (+22%).

Source: Hong Leong Investment Bank Research - 25 Apr 2016