Investment Highlights

• We initiate coverage on CCK Consolidated Holdings Berhad (CCK) with a BUY call and a target price of RM0.79, based on 13.2x FY21F PE. CCK is principally engaged in retailing and poultry farming which mainly operates in East Malaysia. CCK’s headquarter is located in Kuching, Sarawak and the Group focuses on four key business segments namely Poultry, Prawn, Food and Services as well as Retail segments.
• Stand out from the crowd. The Group dispels the general perceptions among investors toward poultry counters for its highly cyclical business and volatile earnings. CCK boasts an undisputed strong track record against its closet comparable peers such as Teo Seng Capital, LTKM and Lay Hong with its ability to cling on to profitability for every quarter for the past 10 years and even during business downcycles. This was mainly attributable to its concentration in downstream business which commands stable margin coupled with better control of feed cost via its strategic stake in an associate.
• Proven track record underpinned by experienced management. CCK was incorporated in 1996 and initiated by YBhg. Tan Sri Datuk Tiong Su Kouk who is currently holding Non-Independent Non-Executive Chairman position. The Group started as a family-run business long time ago and now becomes a leading player in the poultry industry in East Malaysia with an estimated market share of 35%. Moreover, CCK has expanded its business operation and footprint in Indonesia (mainly Pontianak and Jakarta) to diversify its business geographical exposures. Currently, CCK has 63 retail stores spanning across East Malaysia together with 1 wholesale and 6 retail stores in Pontianak, Indonesia. Currently, the business is still under the supervision of Tiong family along with professional managers. With the vast experience, knowledge, leadership, technical know-how, strong business network coupled with customer loyalty on repeated sales, we believe this will spur CCK to a solid growth going forward.
• Striving on downstream segment. Besides focusing on it upstream poultry business, the Group also expanded into downstream business through retail segment. Retail segment makes up c.70% of total revenue, involving in trading of cold storage products which include meat & poultry, mainly source from its Poultry segment as well as frozen food, fruits and vegetables. Frozen food such as beef, seafood, fruits and vegetables are imported from West Malaysia and overseas (i.e. Australia, New Zealand, Europe, China, India, Vietnam and Singapore) as well as cultivations from local fishermen and farmers. The Group is optimistic to strengthen this segment by expanding more stores with a variety of store format such as stand-alone stores, convenience stores and supermarkets depending on suitability of location. For FY20, CCK intends to open two supermarket outlets in Kuching (3QFY20) and Kota Kinabalu (4QFY20). Moreover, the Group has opened two retail stores in Kota Marudu, Sabah and Asajaya, Sarawak in Feb’20 and July’20, while remaining two stores in Sarawak will be opened in 3QFY20 and one additional store in Sabah. For FY21, the Group has identified to open two more supermarkets in Sibu and Bintulu, and probably four to five more retail stores.
• Anticipating solid expansion for Indonesia market. Indonesian revenue contributes c.16% to the overall Group’s revenue. CCK has just expanded into its Indonesia operation by completing construction of a new factory and logistic centre in Pontianak. The total capex spent is about RM8m to RM10m. The completed facilities will include chicken abattoir, a cold room and downline food processing such as sausages, burgers and meatballs. Current production capacity for processed foods is about 600MT/month to 700MT/month. With the completion of new facilities, the Group is sanguine to see improvement in their production capacity to 1,000MT/month. According to the Group, the completed facilities will take two to three years to breakeven. In term of market share, their presence is literally small as compared to other big poultry players (i.e. CP Indonesia, Sierad and Malindo Feedmill). However, the Group believes product demand is still resilient under current market presence and hopes to improve their Indonesia’s revenue contribution to 20% moving forward.
• Benefiting from lower feed cost via its strategic stake in associate. In 2016, the Group acquired a 27.2% stake in Gold Coin Sarawak Sdn Bhd (GCS) for RM20.7m. GSC is a leading animal feed manufacturer in Asia. From the acquisition, CCK enjoys a lower feed cost as most of the feeds are sourced from its associate. Cost of feeds make up 40% of total cost of sales. Thus, the Group is able to deliver better margin banking on its competitive price advantage amid stable cost of raw material. We witnessed the improvement in the Group’s gross profit margin of 17% to 19% during FY17 to FY19 post acquisition as compared to previous of 14% to 16% during FY14 to FY16.
• Impressive growth prospects banking on variety of product offerings and store formats. Moving forward, we envisage the Group’s revenue and headline net profit to post healthy growths amid current pandemic. Based on its latest financial results (1QFY20), both topline and bottomline soared +3.7% yoy and +9.3% yoy respectively in view of stronger sales from all of its segments. We deem this strong set of results which was relatively unfazed by the movement control order (MCO), attributable to the ‘defensiveness’ of its nature of business, i.e. consumer staples, which is classified as “essential services” during MCO. Moreover, the Group is sanguine to increase their stock keeping units (SKU) with variety of product range and offering niche products, such as special breed chicken (Kampong chicken), better grade beef cuts (Wagyu beef) and higher quality fish and seafood (Salmon) to cater specific consumer groups and lifestyle towards healthy foods, freshness, traceability and sustainability. In addition, CCK plans to re-model its existing stores to improve customers’ footfall as well as to launch more convenience store format in small towns where the outlets can be served by the Distribution Centre (DC) which are closer to the localities.

Earnings Outlook

• We estimate the Group’s net earnings in FY20F to ease slightly by -1.2% yoy in view of minimal impact from COVID-19 pandemic. However, we reckon that FY21F earnings to resume its growth trajectory, soaring +12.8% yoy, spurred by higher-than-expected margin as well as improved retail stores sales. Furthermore, the Group’s net profit margin is expected to remain steady around 4%-5% in line with its strategy to enhance its downstream business as well as riding on lower feeds cost from its associate.

Valuation/Recommendation

• We initiate coverage on CCK with a BUY call and a target price of RM0.79, based on 13.2x FY21F PE. The PER assigned for valuation is slightly higher to its 3-year historical average PE of 12.7x. We like this stock in view of its: 1) strong presence in East Malaysia with its dominant position in poultry; 2) Integrated poultry farming with endto-end upstream to downstream business model; 3) Enjoying cheaper and better control of feeds costs via its associate, GCS; and 4) Strong earnings track record against its closet comparable peers.

Source: JF Apex Securities Research - 30 Jul 2020