Result

• CCK Consolidated Holdings Berhad (CCK) registered a net profit of RM7.6m during 2QFY20, down 6.5% qoq and 14.8% yoy amid disappointing revenue which deteriorated 4.4% qoq and 7.0% yoy.

• As for 1HFY20, the Group posted net profit and revenue of RM15.6m and RM314.8m, contracting 3.9% yoy and 1.8% yoy respectively. The uninspiring results were dented by poor results from Poultry, Prawn and Food service segments arising from restricted movement under movement control order (MCO) despite improved performance in Retail segment.

• Within expectation. The Group’s 6MFY20 net profit of RM15.6m was within ours in-house (47.6%) and market estimates (46.2%) arising from better-than-expected result from Retail segment.

Comment

• MCO weighed down overall QoQ’s earnings… CCK’s revenue and operating profit tumbled 4.4% qoq and 5.9% qoq respectively in view of massive contraction in Food service segment (as revenue dropped 88.5% qoq and no operating profit registered during this quarter) due to closure of school during pandemic. Moreover, Prawn segment’s revenue also dropped 32.0% qoq and registered operating loss of RM0.4m during this period arising from lower export sales (mainly Japan and Australia), no thanks to global lockdown. However, Retail segment managed to post marginal growth of 0.2% qoq on the back of strong operating profit margin (+16.7% qoq) underpinned by higher footfall from retail customers.

• …..as well as YoY. On the same note, revenue and operating profit on yearly basis were also bogged down by lockdown during MCO period which limited the business operation (revenue: -7.0% yoy; operating profit: -15.5% yoy). However, despite pandemic situation, Retail segments’ revenue and operating profit rose 0.7% yoy and 24.1% yoy respectively, as the segment being classified as “essential business” and was able to operate at limited business hours. Moreover, Indonesian revenue contribution also improved during this period (20.6% yoy vs 2QFY20:16.4% yoy) as business operation in Indonesia was as usual (no lockdown in Indonesia).

• Cumulatively, 6MFY20 revenue and operating profit depleted 1.8% yoy and 6.6% yoy respectively in view of MCO imposed by government to cease the spread of COVID-19 virus which led to closure or limited operations of some CCK‘s customer, thus affecting overall their business performance. Moreover, strengthening of USD against MYR during this period also resulted in higher cost of sales, thus leading to lower gross profit margins (19.8% yoy vs 6MFY19:20.1% yoy).
   
• Opening of new outlets to drive earnings. Looking forward, CCK is sanguine to open two supermarkets format in Kuching and Kota Kinabalu in 3QFY20 and 4QFY20 respectively. Moreover, the Group also plans to open two retail stores outlets for the rest of year. Besides, CCK believes its business performance to register a stellar growth amid easing of movement restriction during recovery movement under movement control order (RMCO).

Earnings Outlook

• We retain our earnings forecasts for FY20F and FY21F at RM32.8m (-1.2% yoy) and RM36.9m (+12.8% yoy) respectively.

Valuation/Recommendation

• Maintained BUY call for CCK with unchanged 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 favour the stock in view of its: 1) strong presence in East Malaysia with its dominant position in poultry; 2) Integrated poultry farming with end-to-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 - 25 Aug 2020