· Another interesting poultry stock to watch. After we featured poultry player PW Consolidated Bhd (Trading Buy; FV: RM1.58) in mid-Jan which drew some buying interesting, today we introduce yet another poultry stock, which is also based in Mainland Penang, CAB Cakaran Corp Bhd (CAB). Unlike PW which operates its broiler farming business only in the north, CAB has farms throughout the Peninsular. It has a larger capacity of 3.6m birds/month currently and RM670m annual turnover compared to PW’s 2m birds/month capacity and RM250m annual turnover. In addition, CAB has transformed in the past 2-3 years, gaining in terms of stock price as well as improved earnings profiles since the second generation took over the helm.

· An integrated poultry producer. Currently, CAB has 10 breeder farms and 117 broiler farms throughout the Peninsular Malaysia. These farms are grouped under the integrated poultry farming and processing unit contributes three-quarters to the group’s revenue. As livestock earnings could be erratic, CAB is also involved in downstream business particularly the value-added food products like cooked chicken and this segment contributes c.6% of group’s topline with profit margin almost double that of the livestock business. Under its supermarket division, CAB currently operates eight outlets under the brandname of Jaya Garing mainly in East Coast. Despite making up less than 20% group’s revenue, earnings contribution from this segment is still insignificant at the moment. The last business segment is marine products which contributed less than 1% of the group’s turnover.

· From Malaysia to the Lion City. With the acquisition of 51% stake worth SGD7.4m in Tong Huat Poultry Processing Factory Pte Ltd (TH), which was announced in last October, CAB will gain immediate presence in Singapore as TH is one of the seven licensed slaughter houses there with market share of 15%. Upon completion of the acquisition which is expected in April, TH would add another capacity of 550k-600k birds/month to CAB capacity. In addition, CAB will spend RM10m-RM20m capex this year to expand its breeder farms in Juru, Penang and Padang Meha, Kedah. With the acquisition and expansion plans, CAB is able to achieve 5m birds/month capacity by year-end.

· Value unlocking for land assets. CAB has been acquiring parcels of lands mainly in Mainland Penang, such as Bukit Mertajam and Batu Kawan, more than 20 years ago with the purpose for farming expansion. However, with the rapid development in Mainland Penang, today these lands are no longer suitable for farming activities as there are close to housing estates, which may cause environmental issue. As such, CAB is now considering ways to unlock these lands value either through sale of land or to embark on property development via JV. In its latest FY14 Annual Report, a total of RM64.8m worth of investment properties were reported of which half are vacant land while the rest are being leased out.

· Strong earnings expected. Last Friday, CAB reported a net loss of RM3.2m in 1Q15 from net profit of RM1.2m in 1Q14, due mainly to the integrated poultry farming and processing unit turning to losses as ASP dropped to RM3.64/kg for broilers from RM4.30/kg previously. The lower ASP in 1Q15 was mainly due to the mega flood in the East Coast which caused oversupply of broilers. However, this is a one-off event as currently the broiler price is back to RM5.00/kg with breakeven level of c.RM4.00/kg. We project a net profit of RM13.8m in FY15, from FY14’s RM11.2m, on the assumption of 4m birds/month capacity while a bigger jump in FY16 to RM20.2m with 5m birds/month capacity. Adjusting to CY basis, CY15 net profit is projected at RM18.9m.

· New Trading Buy with FV of RM1.29/share. Although earnings are set to be better, no DPS is expected at least for FY15 given its expansion plan. However, this is a growth stock which looks beyond dividend income. As CAB is bigger than PW, we believe CAB should be valued at CY15 9x PER (10% discount to the FBMSC’s 10x) as opposed to PW’s 8x (20% discount to the FBMSC valuation). Thus, CAB is valued at RM1.29/share and we advocate a Trading Buy rating on the stock. 

Source: Kenanga