INVESTMENT HIGHLIGHTS

• FY17 could be another banner year

• Climbing up the broiler leader board

• Better margins due to scale and new markets

• Keeping an eye on industry consolidation

• Fair Value of RM1.89 based on 12 times PER

Business Overview: CAB Cakaran’s (CAB) is one of the leading broiler farmers with 140 farms mainly in Penang, Kedah, Johor and Melaka. Its current capacity is five million broilers per month. The company’s other business units include processed and frozen food as well as the operation of convenient stores in the Northern region.

FY17 could be another banner year. CAB’s FY16 revenue and profit had hit record high of RM1.1b (+23.5%yoy) and RM26m (+62%yoy), respectively. That also marks CAB’s third straight year of growth. Its FY16 net profit has grew due to higher average selling prices (+15%yoy), higher production volume (+11%yoy) and improved profit margins from its core businesses. Excluding other gains and losses, CAB’s core profit has grown from RM8.18m in FY14 to RM21.24m in FY16, representing a CAGR of 61%. We expect its core profit to grow by another 26.8% to RM26.94m in FY17.

Climbing up the broiler leader board. The higher revenue expected in FY17 is supported by the growth in its biggest segmentthe integrated poultry farming. After a series of acquisitions, the group has advanced from one of the top five positions in Peninsula’s broiler segment to the top three. It could add another 2.5 million broilers per month to its capacity upon completion of the acquisition of Farm’s Best’s poultry farms. We understand the targeted completion timeline for the deal is around 1H17. Following which, CAB could further solidify its leading position in the segment with a capacity of 84 to 90 million broilers per year.

Better margins due to scale and new markets. CAB’s gross profit margin has grown from 8% in FY14 to 8.3% in FY15 and 9.7% in FY16. We expect FY17F GP margin to stay above 9.4% as CAB’s growing volume allows it to reap benefits from its in-house facilities such as feedmill and day-old-chick hatchery. CAB’s new markets like Singapore allow it to command higher ASPs. The higher proportion processed chicken due to the increase in slaughter house capacity (from 60,000 to 110,000 birds per day) should also help it achieve higher blended ASP. Note that CAB has already completed the purchase of Farm’s Best value-added food and frozen food business.

Keeping an eye on industry consolidation. There are more than 3000 broiler farms in Malaysia and this number is expected to shrink further due to the trend of consolidation. As CAB is one of the biggest broiler farmers in Malaysia, we expect it to continue increase its capacity through both organic and inorganic approaches. Organically, the company will continue to upgrade its farms to closed farms, which are more modern and hygienic that will also allow for it to improve on capacity per farm. On the acquisition front, the company is expected to be buying up more small farms to further boost its capacity over time. We expect CAB to reach a capacity of 7 to 7.5 million broilers per month by FY18 based on its growth approach and acquisition strategy.

Plans to enter Indonesia still intact. The company is working closely with the Salim Group to set up integrated poultry farms in Indonesia where the consumption of chicken per capita is only 6.3 kg compared with 40.6 kg in Malaysia, according to the Organisation for Economic Co-operation and Development (OECD). We have not factored any potential growth from this venture in our assumptions. We understand that both parties will start building the farms this year. We expect earnings contribution from FY19 onwards as it will take another year for the farms to be built and for the chicken to grow should everything progress according to plan. Recall that Salim Group now owns 19% in CAB and appointed a director on CAB’s board. CAB can also leverage on its relationship with the Salim Group to sell value-added frozen food products in Indonesia going forward as the Indonesian conglomerate owns more than 11,000 Indomaret convenient stores and over 500 KFC outlets there.

Growing higher value food products. After acquiring Farm’s Best’s frozen food business and slaughter house, CAB is working to grow this division, which provides higher margin compared to the integrated poultry farming segment. We expect the division to contribute about 6-7% to the group’s total sales but negligible profit contribution due to high initial costs from consolidating the new capacity. That said, there is much more upside potential from this segment from FY19 onwards as we expect CAB to reap the benefits of synergy. It could also export the frozen food to countries like Middle East and Japan due to the long shelf life of the processed food to further enhance sales.

Expect FY17 core earnings to grow by 27% to RM27m. We expect higher capacity and average selling prices to drive up CAB’s integrated poultry business, which is estimated to contribute 83% to the group’s total sale. We expect higher average selling prices in FY17 due to stable chicken meat prices yoy and CAB’s slaughtering capacity which almost double, following the completion of acquiring Farm’s Best’s processed food division. When the company successfully finalised the purchase of Farm’s Best’s poultry farms, its broiler capacity would be boosted further. We expect its core income to grow further by 9% to RM29.4m in FY18 based on its existing businesses.

Fair value of RM1.89 based on 12x PER and FY17F EPS of 15.73 sen. The 12x PER is the average of the similarsize poultry companies listed on Bursa.

Source: MIDF Research - 14 Mar 2017