Analysis of CCK Consolidated Bhd

Dear Readers

CCK Consolidated Bhd (CCK) is a holding company of many subsidiaries involved in the business of supply and retail of seafood and poultry products. CCK is based in Sibu, Sarawak.

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Poultry

CCK is the biggest poultry producer in Sarawak, controlling over 35-40% of Sarawak’s poultry market. In terms of revenue, the poultry segment contributed about 29.4% of CCK’s revenue for FY2016.

CCK has an integrated supply chain. It has its own hatchery, breeder, broiler and layer farm. Broiler simply means a type of chicken used in meat farming. Layer farm raises egg-producing chicken (layer chicken) for commercial egg production. Since May 2017, CCK’s production capacity should be at the level of 240,000 eggs per day.

Its farming facilities are present in Sarawak and Sabah. Details of whether it has farming facilities in West Malaysia remains sketchy.

The poultry segment supports the retail segment.

Seafood

CCK also farms and processes seafood including prawns which is mainly for export markets such as Japan where it will fetch a better price.

Retail and supply

Retail is the main source of revenue of CCK. (61.5% of total revenue for FY2016). The retail part of its business consists of over 57 retail stores in Sarawak, Sabah, Klang Valley, Jakarta and Pontianak (capital of Kalimantan Indonesia). Most of the stores are located in Sarawak. The company is seeking to open another 9 stores in East Malaysia over the  course of the next four years.

On top of fresh and frozen produces such as poultry, beef, mutton and pork, the retail stores also sell processed food such as fish balls, sausages, crab meat, mix vegetables, nuggets, chicken satay, burger patties and etc.

CCK’s retail segment sources poultry from CCK’s poultry segment. CCK also supplies its poultry to fast food chains such as KFC and McDonald, in Sarawak.

Financials
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 559049 494095 451282 230798 417954
OPERATING PROFIT (RM’000) 23788 19046 14967 13284 17766
PROFIT TO SHAREHOLDERS (RM’000) 18854 13511 8281 8550 10810
SHAREHOLDERS’ EQUITY (RM’000) 233741 216213 152682 146059 144138
DEBT (RM’000) 68275 48174 32035 35217 40232

RATIO

DEBT TO EQUITY RATIO 0.56 0.54 0.60 0.50 0.50
OCF RATIO 0.35 0.24 0.15 0.21 0.21
OPERATING PROFIT MARGIN (%) 4.00 3.00 3.00 5.00 4.00
PROFIT MARGIN (%) 3.00 3.00 2.00 4.00 3.00
EPS (CENTS) 5.83 8.93 5.33 6.67 5.03
EPS (ADJUSTED) CENTS 5.80 4.40 2.63 2.36 2.51
DPS CENTS 2.00 3.00 2.00 1.50 2.00
DIVIDEND PAY OUT (%) 34.50 33.60 37.52 22.49 39.76
P/E 11.32 12.88 18.22 17.29 15.77
ROE (%) 7.88 6.38 5.09 5.22 5.51

The company’s top line experienced an upward trend between FY2012 and FY2016. Debts are at a manageable level of about RM 1 for every RM 2 of equity. However, short term cash flow, as indicated by the operating cash flow, looks a little stretched out, albeit improving.

ROE has gradually increased over the years under review; indicating that the company was more efficient with the usage of its equity.

However, operating profit and net profit were razor thin. Both were within the range of 2% – 5% per annum. However, this is an industry norm which can be seen in other notable industry players such as CAB Cakaran Corporation Bhd and Lay Hong Bhd.

CCK has never failed to declare dividends. During the period under review, dividends are within the range of 22% to 40% of CCK’s earnings per share, even while the company is expanding. This, and coupled with a low debt to equity, indicate that capital expenditure is not too burdensome on the financials of the company.

Advantages

The supply and sale of fresh and processed food business is a resilient business as there will always be demand for food. The healthy net population growth of Malaysia will ensure a sustainable population size in the near future. This bodes well with CCK’s business.

The poultry and meat processing business is a competitive arena. In Sarawak, CCK is faced with competitions from West Malaysian players such as QL Resources Bhd and Lay Hong Bhd, and in addition to other smaller local players. Lay Hong has a notable retail presence in Sabah through G Mart. However, CCK is leveraging on its geographical strength by focusing its business in the Sarawak market where it is already a household name. As the Sarawak market has not been fully tapped, especially in the rural areas, there is still potential for growth.

CCK’s integrated supply chain ensures better profit margin for its products. It does not rely on third party producers. Further, the benefits of an integrated supply chain is that CCK can easily control the quality of its products. The same also allows CCK to manage its production volume; depending on demand or other factors. Any excess of supply can be easily absorbed by its retail stores without compromising margins.

CCK’s products are HACCP and Halal certified. Being Halal certified enables CCK to position its products to cater the Muslim population in Sarawak. Muslims consist about 30% of the population of Sarawak. At the same time, HACCP ensures CCK’s products pass a high food safety threshold implemented and audited by HACCP. This advantage may not be much if compared to other big players, who may have the same certifications, but it may be an upper hand, as regard to the smaller players, who may not have these certification. Further HACCP and Halal are usually requirements in supplying to hotel and fast food chains.

Disadvantages

Competition among poultry and meat producers can still affect CCK earnings despite its strong position in the East Malaysian market.

An outbreak of livestock diseases may drastically affect consumer confidence, and thus the business.

There is a small exposure of foreign currency risk from the export of products overseas, more notably in USD and Indonesia Rupiah.

Conclusion

The poultry and food retail industry has always been stable despite economic slowdowns. The effects of an economy slowdown, in this industry, are trivial and transient and players are quick to bounce back. Expect no excitement in this “boring” business. But it is these “boring” businesses which will withstand the passing of time, and the trials and tribulations, of Mr Market. Hence, it is no surprise that easy-to-understand and “boring” businesses can always find a home in Warren Buffett’s and Peter Lynch’s portfolios.

At this moment, CCK is trading at a reasonable price albeit it share prices have risen about 66%, in the past year. But I won’t be jumping in anytime soon. CCK’s shares are worth revisiting only when its share prices are more attractive; somewhere between the RM0.85 – RM0.90 range, unless fundamentals have changed. For now, keep CCK in your watchlist.

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Disclosure

The writer does not own shares in this company.

Disclaimer

This analysis is published for your casual and leisurely reading and is not a recommendation to buy, sell or hold shares and must not be relied upon as a financial advice. You are encouraged to seek your own financial advice.

Reference:
  1. FY2017 Annual Report
  2. http://cck.com.my/index.html
  3. http://www.growelagrovet.com/layer-poultry-farming/
  4. https://www.chickencheck.in/farm-to-table/what-are-broiler-chickens/
  5. https://www.thestar.com.my/business/business-news/2017/11/13/cck-to-raise-output-at-kuching-poultry-abattoir/
  6. https://www.thestar.com.my/business/business-news/2017/05/15/cimb-research-starts-coverage-of-cck-with-add-rating/
  7. http://www.focusmalaysia.my/Mainstream/egging-caution-on-bullish-outlook
  8. https://markets.ft.com/data/equities/tearsheet/summary?s=CCK:KLS 

 

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