We came away from our meeting with CCK Consolidated’s (CCK) management last week with a more positive outlook on the company’s prospects. The Group is planning to venture into the supermarket business in Kuching and Kota Kinabalu next year with an estimated capex of RM4m. It is not a new venture given that the Group already has vast experience in running the 59 retail stores throughout the East Malaysian region. Expanding downstream is also one of the ways to lift the Group’s margins and reduce its exposure to the volatility in poultry product prices. We maintain our Outperform call with an unchanged TP of RM0.79 based on 14x FY20 EPS.

• Indonesian operations will continue to be key growth driver. Its Indonesian business, which produces sausage and nuggets, makes up 16% of Group sales while contributing about 20% of the Group’s bottomline. Management has set a target of 25% bottomline contribution in the long term. Currently, the Group has processed food production facilities in Pontianak and Jakarta. In Pontianak, it owns a 150 mt/mth sausage production facility and is in the midst of moving into a bigger space by 1QFY20. The new capacity will be 250 mt/mth, with the facility consisting of chicken sausage production, cold room and slaughtering room. In Jakarta, it is expanding its sausage production capacity from 600 mt/mth to 1,000 mt/mth and is expected to be ready by 4QFY20. The nugget production line, which started running since 3QFY18, has reached a 40% capacity utilization rate. Expansion in both the Pontianak and Jakarta facilities will cost RM6m each.

• Expanding into bigger retail space. It currently runs 59 retail stores, which accounts for 80% of its retail segment, in East Malaysia. Each retail store ranges from 1,200sq ft to 4,000 sq ft in size, and can cater for up to 1,000 stock keeping unit (SKU). 50%-60% of its products are its in-house processed chicken, table eggs and beef/lamb. 70% of its customer base is F&B operators while the remainder is retailers. To cater for a wider range of grocery products, the Group is planning to open 2 supermarkets, one each in Kuching and Kota Kinabalu. The first supermarket, which will have a retail space of 14,000 sq ft, is expected to cost RM1.5m while the second supermarket, which has a bigger retail space of 25,000 sq ft, will cost about RM2.5m. The supermarket can cater for up to 8,000 SKU, which is 8x more than the retail store. It is expected to break-even within a year. The Group also plans to open three retail stores next year, in Sabah (2) and Sarawak (1). The allocated capex for each store is about RM500k. All-in, the total capex for FY20 is about RM20m-25m.

• Upstream supplies sufficient to meet new demand. Despite aggressively growing its retail market business, the Group guided that it will also expand its upstream segment on a gradual basis. The fourth calendar quarter is seasonally the second strongest quarter as demand for poultry products pick up ahead of the Christmas and Chinese New Year celebrations. For 9MFY19, the Group’s earnings met 85% of our full-year projections and is likely to exceed our full-year estimates.

Source: PublicInvest Research - 12 Dec 2019