Old Chang Kee Ltd. - Good things take time
- 1H FY17 Revenue/NPAT met 50.1%/48.6% of our FY17 full year forecasts.
- Signs of bottoming out and momentum could extend into 2H FY17 with gross margin sustaining at c.63%.
- Maintain our view of 2.8% yoy growth in FY17 NPAT after two consecutive years of contraction.
- Declared interim dividend of 1.5 Cents per share, same as 1H FY16.
New outlets and new products underpin demand, and momentum could sustain into 2H FY17.
- Sales from retail outlets increased 5.8%/4.2% year-on-year (“yoy”) in 2Q FY17/1H FY17, driven by:
- Two new outlets in Mar-16 (Chinatown Heritage Centre and Waterway Point); and
- New flavours of puffs (sales for puffs increased 11.6%/12% yoy in 2Q FY17/1H FY17).
- Puffs remained as its major contributor to its revenue, accounting for c.33% to its total revenue in both 2Q and 1H FY17.
- Moving forward, we expect a higher sales in 2H FY17. As mentioned in our intiation report, new products such as Ready Meals and Popcorn Squids were only introduced in late 2Q FY17. In addition, OCK’s latest BBQ Chicken ‘O Curry Puff only made its debut in November 2016 (mid 3Q FY17). We are positive that these new flavour and products could boost sales in 2H FY17, bringing full year Revenue/NPAT yoy growth to 4.9%/2.8% despite a weak 1H FY17. Revenue grew 4.1% yoy in 1H FY17 but NPAT contracted 6.5% yoy.
- New outlet in Changi Airport Terminal 2, and reopening of the three outlets in revamped malls in 3Q FY17, namely Compass One, VivoCity and Tiong Bahru Plaza, should also lift 2H FY17 revenue.
1H FY17 gross margin maintained above 63%; 2Q FY17 gross margin improved by 6 basis points (“bps”) yoy to 63.9%.
- We think that Old Chang Kee Ltd. (“OCK’) has started to reap benefits from its new factory facilities in 4 Woodlands Terrace and Iskandar Malaysia. The enlarged factory facilities provide:
- Storage space for invetories, enabling OCK to bulk purchase raw materials at favourable price; and
- New machineries, lowering production staff costs, increasing productivity and enhancing operating efficiencies.
- While festival promotions in 2H FY17 could weigh against gross margin, we think that gross margin could sustain at c.63% for the rest of FY17.
Maintained 'Buy” rating and DCF-derived TP of S$0.98
- We continue to view OCK as a defensive growth play with a 28% capital upside to our TP of S$0.98 and a 4% dividend yield.
- The completion of its reconstruction work in 2 Woodlands Terrace in 1Q FY18 and integration with the adjacent new factory would be the inflection point for OCK. We expect better earnings by 2Q FY18, on the back enhanced manufacturing efficiencies, and introduction of new product offerings with better margins.
- We remain upbeat that its new factory facilities in Singapore and Malaysia would bode well with its expansion strategy to grow domestically and regionally. Strategy execution remains the main risk.
- Ex-dividend, OCK is currently trading at a forward price-to-earnings (P/E) ratio of 18.2x, which is c.8% discount to its Singapore packaged food peers’ 19.7x