Result

CCK Consolidated Holdings Berhad (CCK) registered a net profit of RM6.2m during 3QFY21 which soared 15.5% qoq but depleted 32.9% yoy. Meanwhile, revenue stood at RM173.2m which was up 3.8% qoq and 4.9% yoy.

As for 9MFY21, the Group’s net profit of RM17.6m was down by 29.2% yoy despite improving revenue, +5% yoy. The lower-than-expected earnings was deteriorated by dismal operating margin, eroded by significant increase in feed prices coupled with higher operating cost.

Below-than-expected result. As for 9MFY21, the Group’s net profit is below our in house and market expectations which only accounts for 62.9% and 65.7% of full year earnings respectively given poor performance from all segments except Prawn segment.

Comment

Better QoQ performance resulted from better contribution from Retail segment as well as its Indonesian market. CCK’s revenue and operating profit (OP) rose 3.8% qoq and 15.5% qoq respectively during 3QFY21, thank to stellar result from Retail segment which offset the subdued performances from Poultry, Prawn and Food segments. Retail segment’s revenue up 6.7% qoq amid improving OP margin by 0.7ppts qoq as sales were improved arising from its new Fresh Mart outlets as well as supermarkets which were opened a year ago. Additionally, Indonesia market also yielded a positive contribution to the Group level as production and sales volume of sausages, nuggets and other processed products increased.

Hike in feed prices eroded YoY OP margin despite stellar revenue following additional new retail store from Retail segment. CCK’s revenue increased 4.9% yoy underpinned by strong result from Prawn segment (+17.1% yoy) and Retail segment (+10.6% yoy). Strong result from Prawn segment spurred by its newly secured customers (South Korea and Australia) as well as domestic sales. Meanwhile, Retail segment was boosted by strong sales from its five retails stores and two supermarkets which were opened in the past twelve (12) months. During this quarter, one additional CCK Fresh Mart retail store was opened in Kota Kinabalu, Sabah [Current outlets:- 2 supermarkets, 61 retail stores, and 6 wholesale stores]. Nevertheless, OP margin down by 2.3ppts yoy resulted from losses recorded in Poultry segment in view of significant hike in feed prices as well as Food segment due to closure of boarding schools in Sarawak.

Margin squeeze during 9MFY21 despite strong revenue. As for 9MFY21, OP margin down by 2.2ppts, no thanks to hike in feed prices which heavily affected its poultry segment as well as higher operating cost following ongoing expansion of our Malaysian retail network and Indonesian operations. However, revenue increased by 5% yoy driven by stronger results from Prawn (+18.9% yoy) and Retail segment (+9.1% yoy) following stellar sales from Prawn segment and better contribution from Malaysian and Indonesia markets under Retail segment.

Outlook to be spurred by Retail segment despite challenges persist. Looking forward, the Group remains cautious on the business sentiment given unforeseen spike of number of Covid-19 cases that could lead to re-imposition of movement restriction despite higher vaccination rate among adult population as well as booster shots administrated on selected group of people. Additionally, the Group also concerns on strengthening US Dollar against Ringgit Malaysia coupled with ongoing hike in feed price which could hamper the Group’s cost structure and margin. Nevertheless, CCK will put in concerting efforts to mitigate this risk and rising cost to ensure a smooth business operation. Overall, we believe Retail segment to sustain its earnings underpinned by its strong sales, thanks to their wide presence across in East Malaysia. Also, we reckon that Indonesian operation to bear fruit arising from its new logistic and facilities to cater sturdy demand.

Earnings Outlook

In view of lower-than-expected earnings, we tweak down our earnings forecasts for FY21F and FY22F by 16.4% and 16.8% to RM23.4m and RM29.3m respectively to account for lower revenue and margin.

Valuation/Recommendation

Maintain BUY call on CCK with a lower target price of RM0.70 (RM0.74 previously) following our earnings downgrade. Our valuation is now pegged at 14x FY22F PE of 5 sen EPS (6 sen previously). PER assigned is slightly above its 3-year +1 standard deviation PE of 13.6x. We expect the Group to register healthy business growth in FY22F as more outlets to be opened across East Malaysia as well as higher contribution from Indonesian 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 - 25 Nov 2021