Result

• CCK Consolidated Holdings Berhad (CCK) posted a net profit of RM5.4m during 2QFY21 which tumbled 11.5% qoq and 29% yoy. However, revenue stood at RM166.9m which was up 2% qoq and 8.5% yoy.
• As for 1HFY21, the Group’s net profit of RM11.4m was eased by 27.2% yoy despite encouraging revenue which improved 5% yoy. The disappointing earnings was dented by higher feed cost as well as operating cost which dampened the Group’s profit margin despite stellar sales from Prawn and Retail segments.
• Below-than-expected result. As for 6MFY21, the Group’s net profit was below our in house and market expectations which only accounted for 32.5% of full year earnings. The lower-than-expected earnings was bogged down by subdued performance from all segments except Retail segment.

Comment

• Foreign exchange cost eroded QoQ margin despite stronger revenue from festive season. CCK’s revenue improved by 2% qoq during 2QFY21, thanks to three major festivals (Hari Raya Aidilfitri, Kaamatan Harvest Festival and Gawai Harvest Festival) which lifted the Retail segmental revenue (+2.6% qoq) given sales improvement from both Malaysia and Indonesia markets. Also, Prawn segmental revenue grew by 15.8% qoq resulting from stellar sales from local market as well as massive exports sales to Australia, Korea and Taiwan and its traditional markets in Japan. Nevertheless, operating profit (OP) declined by 0.9ppts qoq due to stronger USD against MYR which affected the cost structure of the Group. On top of that, Retail and Poultry segmental OP margins depleted by 19.2% qoq and 27% qoq given higher costs of imported beef, lamb, fish and other frozen products as well as feed prices for Poultry segment.
• Retail segment boosted YoY growth. The Group’s revenue jumped 8.5% yoy in view of higher Retail segmental revenue (+9.6% yoy) benefiting from two CCKLocal supermarkets (in Kuching and Kota Kinabalu) and four CCK Fresh Mart retail stores which were opened in a year ago. As of 2QFY21, CCK has 68 stores (60 CCK Fresh Mart retail stores, 6 CCK wholesale stores and 2 CCKLocal Supermarkets). Additionally, sales from Indonesia operation increased by 7.6% yoy as new factory and logistics centre in Pontianak has commenced its operation since Jan’21 to cater tremendous demand of sausage production. Other than that, Prawn segmental revenue jumped 58.7% yoy in view of turnaround of sales due to depressing global pricing and demand for prawns pursuant to Covid-19 pandemic. However, OP margin declined by 2.6ppts yoy, no thanks to lower operating earnings from Poultry, Prawn and Retail segments.
• Prawn and Retail segments spurred 1HFY21 performance. As for 1HFY21, revenue inched up 5% yoy but OP down 57.4% yoy. Prawn segmental revenue soared 19.7% yoy with operating profit of RM0.5m (from operating loss of RM0.5m a year ago) following massive export sales to new customers (Korea and Taiwan) in addition to their traditional markets (Australia and Japan). Also, contribution from local market through CCK retail network in Sarawak also higher during this period. Meanwhile, revenue and OP for retail segment increased 8.4% yoy and 3.3% yoy respectively, thanks to stellar contributions from both Malaysia and Indonesia markets.
• Opening of new stores still on track despite rising number Covid-19 cases. Looking forward, the Group remains cautious on the business sentiment given unforeseen spike of number of Covid-19 cases, movement restriction on travel as well as strict standard operating procedure (SOP) for food operators despite higher vaccination rate in Sarawak state. Also, the Group is cautious on strengthening of the US dollar which could lead to rising materials cost, hence affecting its business cost structure and margin. Therefore, CCK will put in concerting efforts to mitigate this risk and rising cost. Despite the challenging environment, the Group remains intact to open its third CCKLocal supermarket in Sibu, Sarawak in 4QCY21 and three more CCK Freshmart retail stores in the remaining quarters of the year. Overall, we believe Retail segment to sustain its earnings given its concerting efforts to widen its presence in East Malaysia as well as strong production in Pontianak, Indonesia.

Earnings Outlook

• In view of lower-than-expected earnings, we tweak down our earnings forecasts for FY21F and FY22F by 20.2% and 15.2% to RM28m and RM35.2m respectively to account for lower revenue and margin.

Valuation/Recommendation

• Maintain BUY call on CCK with a lower target price of RM0.74 (RM0.79 previously) following our earnings downgrade. Our valuation is now pegged at 12.3x FY22F PE of 6 sen EPS (6.4 sen previously). PER assigned is slightly above its 3-year historical average PE of 11.4x. We expect the Group to register healthy business growth in FY22F as more outlets to be opened across East Malaysia, full vaccination rollout 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

Source: JF Apex Securities Research - 26 Aug 2021