INVESTMENT MERIT Kim Teck Cheong (KTC) is a leading distributor of consumer packaged goods (CPG) in East Malaysia & Brunei where it is also involved in the production and sales bakery products. We project earnings growth of 13% and 9% in FY23-24, driven by the economy reopening, expansion of its range of CPG products, growing sales of bakery products, and efficiency gains from scale as well as the adoption of information technology. We value KTC at RM0.33 based on PER of 9x FY24F earnings. ADD.

A leading CPG player in East Malaysia and Brunei. KTC is an East Malaysia-based distributor of CPG. As a leading player with more than 85 years of experience in East Malaysia and Brunei, KTC boasts an extensive distribution network and coverage in most parts of East Malaysia and Brunei. It holds exclusive distributorships for well-known brands such as Hawley & Hazel Chemical, Procter & Gamble, L’oreal, Oriental Foods, Kimberly-Clark and more. Given its scale, it enjoys significant cost and efficiency advantages over its competitors. It also manufactures and distributes Creamos and Gardenia bakery products in East Malaysia and Indonesia, as well as provides logistic services to third parties such as The Chicken Rice Shop, Sushi King, and others.

Growing SKUs. To support its growing SKUs, it is expanding its warehouse capacity by an additional 180k sq ft by the end of 2023 (currently 350k sq ft with 13 warehouses in the East Malaysia and Brunei regions).

Embracing technology. KTC has adopted the ERP and automation system to enhance its work process and delivery efficiency, and route planning. KTC will add 200 more trucks to its fleet by Dec 2023 to keep up with the expansion in its product offerings.

Tremendous growth potential in bakery. KTC’s bakery business still has plenty of growth potential in its main market of Sabah. It is capitalising on the potential by: (i) widening its coverage within Sabah, (ii) ramping up production, and (iii) increasing the restocking frequency. It is also constructing a RM4.5m bakery plant in Sarawak which is expected to be completed by 2HCY24.

We project earnings growth of 13-9% in FY23-24, underpinned by the economy reopening, expansion of its CPG product offerings, growing sales of bakery products and efficiency gains from scale as well as the adoption of information technology.

We value KTC at RM0.33 based on 9x PER FY24F earnings, in line with the forward PER of its closest comparable peer, i.e. DKSH. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). ADD.

Risks to our call include: (i) the loss of distributorships of key CPG, (ii) inability to pass on rising distribution and warehousing costs to end-users, and (iii) inability to raise prices of price-controlled items.

Source: Kenanga Research - 17 Feb 2023