CCK Consolidated Holdings Bhd
(Nov 12, 72 sen)
Maintain add with a lower target price (TP) of 98 sen: Since June, the ringgit has weakened against the US dollar by 4.9%. As CCK Consolidated Holdings Bhd imports its poultry feed (65% of total costs) in US dollars, this has resulted in higher raw material prices. Despite the recent drop in prices of corn and soybean, there is a two- to three-month lag in passing through the lower prices. This is likely to negatively impact margins of its poultry segment in the short term.

 
We estimate that CCK hiked its chicken and egg average selling prices by 2% to 3% quarter-on-quarter in the third quarter of 2018 (3Q18). However, we gather the quantum of the increase was insufficient in passing on the higher raw material costs. Also, CCK has not recorded stronger sales after Malaysia’s 14th general election in May and the zero-rating of the goods and services tax on June 1. Instead, CCK believes most consumers have been spending more cautiously given a weaker economic outlook.

We regard the 19.5% rise in East Malaysia’s minimum wage to RM1,100 per month from Jan 1, 2019 as a double-edged sword for CCK. On the positive side, CCK should gradually benefit from an increase in consumer spending power among workers entitled to the pay hike. However, we estimate that 35% to 40% of its total workforce are currently paid below the new minimum wage. As such, we expect CCK’s labour costs to increase.

By the first half of 2019, CCK aims to open six stores in East Malaysia, resulting in a total of 65 outlets. It also plans to refurbish a few of its existing stores, including expanding store sizes to carry a wider product offering such as ready-to-eat meals, fruits and vegetables. Meanwhile, its new nugget line in Indonesia is slated for commercial production by end-4Q18, with trial runs currently underway.

Given a more muted outlook ahead, we lower our 2018 to 2020 earnings per share forecasts by between 20.9% and 22.7% to account for a higher feed cost, lower retail sales and higher labour costs. Accordingly, our sum-of-parts-based TP is lowered to 98 sen but our “add” call is maintained. We value CCK at a 2020 forecast price-earnings (PE) ratio of 18.3 times, a 30% discount to our consumer sector average target PE of 22.8 times for 2019. Take note that we rolled over our valuation to 2020. — CGSCIMB Research, Nov 9