Since our Trading Buy report dated 3-Mar-2015, CAB’s share price has gained 166% amid an expansion-led earnings growth (FY13-FY16 CAGR of 29.3%). Notable M&A activities include the acquisition of 200.2 acres of agricultural lands with six breeder poultry farms for RM63m and more recently, the proposed acquisition of 26 broiler poultry farms for RM58.5m. Although CAB’s growth prospects are promising, we believe the positives have already been priced in. Taking into account the warrants dilution, CAB currently trades at a FY18E FD PER of 17.3x which we believe is at best, fairly valued. As such we bring closure to our Trading Buy recommendations and downgrade the stock to NOT RATED.

CAB is the leading integrated broiler farmers in the country with a capacity of 5m broilers/month. For FY16, the Agricultural/poultry farming/food processing accounted for the bulk of revenue at 86.3%, followed by Supermarkets (11.3%), and others (2.4%).

CAB has stellar track records with CAB’s revenue growing at a 3- year CAGR of 21.6% while its Net Profit ballooned at a higher CAGR of 29.3% (FY13-FY16). In the recent FY16 results, revenue crossed the billion-Ringgit mark with an 23.5% YoY growth to RM1,101.3m. Revenue was driven by an increase in the production of sales of dayold-chicks broilers, high trading volumes of feeds and higher ASPs. Concurrently, the higher trading volumes and ASPs also led to core net profit growing to RM20.5m (+28.0% YoY) and core net margins expanding by 7bps for the year.

Still on an expansion spree. Upon the completion of the Farm’s Best poultry farms acquisition (1H17), CAB could add another 2.5 m broilers/month (+50%) to its existing 5m/month capacity and the production of day-old chicks will also increase from 4.5m/ month to 6m/month. Efforts are also being made to form a strategic partnership with Salim Group to set up integrated poultry farms in the Indonesian market where the per capita consumption is merely 6.3kg (Malaysia: 40.6kg). However, earnings will only begin to reflect in FY19 given the 1-year construction period. At the same time, CAB will continue to upgrade its farms to the more modern and hygienic closed-farm types, which enable incremental increase in capacities and efficiency.

Net profit to grow by 29.2%/18.9% for FY17E/FY18E Looking ahead, we are projecting revenue to grow by 17.0%/14.0%, taking into account the new capacities and a higher ASP assumption. At the same time, greater economies of scale and operational efficiency should also see net margins expanding by 20bps/9bps to 2.06%/2.15% in FY17E/FY18E.

Positives already priced-in? Although CAB’s growth prospects are promising, we are guarded on valuations and believe that the positives have already been priced in. Taking into account the warrants dilution, CAB currently trades at a FY18E FD PER of 17.3x, compared to the peer average of 8.5x and FBMSC index at 12.5x. We believe that CAB is at best fairly valued. As such we bring closure to our former Trading Buy recommendation and downgrade the stock to NOT RATED.

Source: Kenanga Research - 26 Apr 2017