Result

• CCK Consolidated Holdings Berhad (CCK) recorded a net profit of RM6.1m during 1QFY21 which depleted 45.3% qoq and 25% yoy. On the same note, revenue stood at RM163.7m which was down 7.7% qoq but up 1.7% yoy.

• Below-than-expected result. As for 3MFY21, the Group’s net profit was below our in house and market expectations which only accounted for respective 15.9% and 15.5% of full year earnings. The lower-than-expected result was due to subdued performance from all segments except Retail segment.

Comment

• Subdued QoQ performance resulted from spike in Covid-19 cases in Sarawak. CCK’s revenue and operating profit (OP) tumbled 7.7% qoq and 44% qoq respectively given higher Covid-19 cases in Sarawak during 1QFY21. Retail segment’s revenue and OP deteriorated 5.8% qoq and 7.3% qoq respectively due to closure or minimal outlets operation in northern region of Sarawak. Besides, Food service business segment was also dampened by higher Covid-19 cases (as revenue and OP down 32% qoq and 66.8% qoq respectively) which led to closure of schools thus affecting their food contractor customers. Additionally, Prawn segment depleted 28% qoq and 73.5% qoq in revenue and OP respectively following continuous subdued global demand and pricing of prawns. However, soothing result from Prawn segment was offset by contribution from local sales as the Group shifted sales to local market instead of exports market (exports sales declined by 40% during 1QFY21). Moreover, the Group highlighted that revenue contribution from Indonesia operation improved to 18.3% in Mar’21 as compared to 17.9% in Dec’20 given massive production and sales of sausages and nuggets.

• Encouraging Retail segment failed to offset disappointing YoY growth. The Group’s OP declined 27.8% yoy despite higher revenue which improved 1.7% yoy. Soothing OP was dented by higher raw material cost which resulted in dismal Poultry’ segment, as OP margin slid - 18.2ppts yoy. Nevertheless, Retail segment managed to register stellar growth as revenue and OP rose 7.1% yoy and 24% yoy respectively banking on opening of two CCK Local supermarkets and four CCK Freshmart retail stores during the year. One new outlet has commenced operations in Keningau, Sabah during 1QFY21. As of 1QFY21, CCK has 68 total stores (vs 1QFY20: 62 stores). As for Indonesia operation, the Group said that revenue improved by 18.2% yoy and new factory and logistic centre in Pontianak, Indonesia has commenced its operation in Jan’21 to cater massive sausage production.
   
• Opening of new outlets will still on track amid unforeseen spike in Covid-19 cases. Looking forward, the Group remains cautious on the business sentiment and outlook on the back of rising materials cost which could affect its business cost structure and margin coupled with slower vaccination roll-outs in East Malaysia. Therefore, CCK will put in concerting effort to mitigate the risk and rising cost amid this challenging environment. Despite uncertainty triggered by resurgence of Covid-19 cases, the Group still remains sanguine to open its third CCK Local supermarket in Sibu, Sarawak in 4QFY21 as well as four CCK Freshmart retail stores in the remaining quarters of the year.

Earnings Outlook

• In view of lower-than-expected earnings, we tweaked down our earnings forecasts for FY21F and FY22F by 8.4% and 1.9% to RM35.1m and RM41.5m respectively to account for lower revenue and margin.

Valuation/Recommendation

• Maintain BUY call on CCK with an unchanged target price of RM0.79 as we roll over our valuation to FY22F. Our valuation is now pegged at 12.3x FY22F PE and PER assigned is closed to its 3-year historical average PE of 12.1x. We expect the Group to register healthy business growth in FY22F banking on more outlets to be opened across East Malaysia, full vaccination roll-out in the nation as well as higher contribution from Indonesia operation.
   
• We favour the stock for 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, Gold Coin Sarawak Sdn Bhd (GCS); and 4) Strong earnings track record against its closest comparable peers.

Source: JF Apex Securities Research - 27 May 2021