Valuation / Recommendation

We recommend SUBSCRIBING to Sik Cheong Bhd (Sik Cheong), with a FV of RM0.33 based on 10x FY26F EPS, representing a potential upside of 24% to the IPO price. Our target PE of 10x is at a 30% discount to comparable peers’ average valuation, given Sik Cheong’s smaller market capitalisation. We like the stock for its proven track record, strategic expansion plans, and healthy balance sheet with expanding margins.

Investment Highlights

Proven track record. Sik Cheong has achieved an impressive 3-year revenue CAGR of 23.2%, rising from RM43m in FY21 to RM78m in FY24. This growth can be attributed to the company's ability to secure sales from its large customer base of more than 500 annually. Notably, 90% of their clients are recurring customers, demonstrating Sik Cheong’s reliability as a distributor of RBD palm olein oil products in Malaysia. The company has also established long-term relationships with its key suppliers, with 3 out of 4 having >10 years of relationships.

Diversifying into soybean oil. Sik Cheong currently offers RBD palm olein oil as its sole product. Management is considering diversifying into high oleic soybean oil as a potential new product due to several reasons, including 1) Less competition in the market; 2) Cost-effective and healthier option; 3) Cross-selling opportunities from existing customer demand; and 4) Second most demanded cooking oil in Malaysia.

Packaging facility expansion. A significant portion of the IPO proceeds (RM7.2m) will be used to rebuild Factory No. 9 into a 3-story building with new floor space. This expansion is necessary for its new venture into soybean oil, which will require additional space for new packaging machinery. To reach a wider customer base, Sik Cheong also plans to expand its operations to other states in Peninsular Malaysia, particularly Perak, Pahang, Negeri Sembilan, and Melaka.

Expanding margins. Sik Cheong's gross margins increased from 12.8% in FY21 to 16.0% in FY24. Management has effectively controlled production costs by passing on rising costs to customers through higher selling prices and implementing cost optimisation measures. A slight decline in FY25 margins is expected due to one-off IPO expenses, but improvements are anticipated in FY26-27 due to positive operating leverage with production and sales ramping up after the completion of Factory No.9 expansion.

Risk factors for Sik Cheong include (1) Change in consumer preference of edible oil and (2) Significant fluctuation in raw materials (CPO) price.

Source: Mercury Securities Research - 30 Jul 2024