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 

 

Analysis of Scientex Berhad

Dear Readers

Today we dissect Scientex Berhad (“Scientex“) to find out what it takes to be “healthy, friendly & happy”.

 

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Scientex consists of two main arms; the manufacturing of plastic packaging products and property development.

Plastic packaging manufacturing

Product packaging typifies the way the goods are sold. Not only does packaging secures goods, it also adds shelf life to certain perishable products and also ensures that products, such as food and medicine, remains hygienic. Moreover, packaging is often seen first before the actual product. Hence packaging gives a presentable appearance which entices buyers and also adds value to the price of the product.

In logistics and warehousing, packaging assists with warehouse organisation and space utilisation. Imagine a scenario where boxes, containing goods, are stacked on a pallet. In order to utilise space efficiently, boxes may be required to be stacked vertically. But staking boxes vertically may increase the risk of the boxes collapsing. However, when the boxes are secured by using a stretch film, the risk of boxes collapsing drops significantly. Hence, efficiency is space utilisation translates to profit.

1200px-Pallet_wrapper
Stretch film wrapping machine in action. Credit: Wikipedia

The point in which I am proposing is that plastic packaging is a vital component of the clockwork of consumerism. And Scientex, being at the forefront of plastic packaging manufacturing, is able to cash in on consumerism.

Scientex produces a variety of plastics packaging. They can be grouped into 4 broad categories:

  1. Industrial packaging.
  2. Consumer packaging.
  3. Automotive interior.
  4. Green Energy products.

Industrial packaging includes, among others, stretch films (to wrap around pallets), woven bag (bags to store fertilizers, animal feed, cement, etc), raffia string and FIBC bag (basically supersized tote bags which can fit up to 500kg -1000kg of materials).

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Scientex  has the reputation as the largest stretch film producer in Asia Pacific and stretch film is the core of the manufacturing division. Credit: Scientex Bhd.

On the consumer side, Scientex’ manufactures plastic wrapping and packaging for breads, beverages, ramen/instant noodles, fresh food products and feminine products. It also provides the printing services for the wrappers and packaging.

Scientex produces polymer products and skin materials from PVC or thermoplastic polyolefin (“TPO“) sheets for the automotive sector which are used to wrap, among others,  seats, dashboards, door trims, consoles and armrests giving those items a leather-like appearance and touch. Its clients are mainly Japanese (Toyota, Honda, Subaru, and Suzuki), American (Ford and GM) and local (Proton and Perodua) automotive manufacturers.

On the green energy front, Scientex manufactures films or ethylene vinyl acetate (“EVA“) films which encapsulates solar cells, in solar PV modules. Its functionality is to prevent humidity and dirt from affecting the performance solar cells.

Overall, the manufacturing of plastic packaging represents about 70% of Scientex’s revenue. Notwithstanding that, manufacturing contributed only 30% of Scientex’s operating profit, in FY2017. That accounts to about RM97 million of RM325 million operating profit; translating to a razor thin operating profit margin of about 4%.

Close to 75% of manufactured products were exported overseas where main markets , in terms of revenue contribution, include Japan (21%), followed by Korea (11%) and Indonesia (6.7%), as per FY2016 annual report.

Property development

Scientex’s property development division is a major contributor to top line despite the absence of any synergy between said and the plastic manufacturing division.

Scientex’s property development division focuses on landed housing developments in suburbia across Johor, Melaka and Perak. These property developments consist affordable housing, like Scientex Kulai, Scientex Klebang and Scientex Senai, to luxurious housing developments,  such as Scientex Skudai and E’roca Hills (Kulai).

The gross development value of all of its projects is about RM1.5 billion.

Despite recording less revenue (about 30% of revenue), property development contributed 70% of Scientex’s FY2017 operating profit. Hence, RM227.5 million of operating profit was generated from property sales, in FY2017. That represents an operating profit margin of about 9.5%.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 2,4031,51 2,200,980 1,801,684 1,590,472 1,229,045
OPERATING PROFIT (RM’000) 325,069 312,560 224,978 189,620 146,104
PROFIT TO SHAREHOLDERS (RM’000) 255,873 240,865 158,190 148,450 110,284
SHAREHOLDERS’ EQUITY (RM’000) 1,535,464 1,175,167 941,978 712718 628,665
DEBT (RM’000) 973,909 1,009,439 635,113 664,955 637,732

RATIO

DEBT TO EQUITY RATIO 0.63 0.86 0.67 0.93 1.01
OCF RATIO 0.43 0.53 0.38 0.28 0.49
OPERATING PROFIT MARGIN (%) 13.53 14.20 12.49 11.92 11.89
PROFIT MARGIN (%) 10.64 10.94 8.78 9.33 8.97
EPS (CENTS) 54.83 105.88 70.43 67.12 51.04
EPS (ADJUSTED) CENTS 52.91 49.81 32.71 30.70 22.81
DPS CENTS 16.00 22.00 22.00 21.00 26.00
DIVIDEND PAY OUT (%) 29.18 20.78 31.24 31.29 50.94
P/E 16.14 5.95 10.01 10.35 10.75
ROE (%) 16.75 20.72 16.89 20.84 17.97

Scientex has a lot going for it in the past 5 years. During that time, its top line has been increasing exponentially to a point that it doubled. No small feat indeed.

In August 2016, Scientex underwent a corporate exercise in the issuance of 1:1 bonus issue of shares. As such, there was a dilution in earnings per share, seen in FY2017.

By my calculations, earnings growth rate, is at 18.9%, throughout the years under coverage. However, to achieve such a high rate of growth, the company had to increase its borrowings. Debt is being used to, improve production in its local plants, fund the expansion of its manufacturing operations in the US, and acquire land to sustain its property development.

As a result of higher short-term borrowings, Scientex’s operating cash flow has been pretty tight. However, it is not a cause for concern for a growing mid cap company.

Insofar as dividend is concerned, Scientex paid decent dividends of an average of 20 cents per financial year under coverage; except in the FY2017, where it paid only 16 cents. Dividend payout is very erratic in my opinion as it ranges from 50% – 20%.

Potentials in  manufacturing 

The Nano6 stretch film which are manufactured by Scientex is still competitive in many ways. It is touted as one of the world’s thinnest stretch films. The film is light, thin, more durable and offers a good transparency (making barcode scanning less cumbersome). Nano6 may be the driving force for the production and sales of stretch films and it is surely worth keeping tabs on it.

Scientex’s collaboration with a Japanese company, Futamura Chemical Co. Ltd, in 2016, led to the construction of Malaysia’s biggest biaxially-oriented polypropylene (“BOPP“) film production plant in Pulau Indah, Selangor. The plant is said to have a capacity of 60,000 tonnes. However, it will only be operating at half of its maximum capacity by the end of 2017. While most of its productions are exported to Japan, there is a strong local demand for BOPP which Scientex is looking to exploit. At the moment, Malaysia imports much of its BOPP needs from overseas.

The US remains an untapped market for Scientex. That market only contributes nominally to Scientex sales; less than 1% of exports of plastic packaging. However, things are about to change when Scientex completes its production plant in Arizona. The plant is slated to manufacture stretch films (presumably Nano6) for the US market.  The plant has a maximum output of 30,000 tonne of stretch films per annum and is expected  to boost Scientex’s overall manufacturing capacity of stretch films from 150,000 tonnes per annum to 180,000 tonnes per annum. This expansion will be completed in the end of 2017 with a cost of about USD25 million. Commercial rollout is expected in the first quarter of 2018.

I have mixed feelings about this expansion since the US market only contributes nominally to Scientex’s sales. I foresee Scientex having to spend time and money to develop supply and logistics chains while incurring marketing expenses to build a customer base in the US. As a result, meaningful contribution, if any, can only be seen sometime in FY2019 or FY2020. However, the abundance of shale-gas based resin, for raw material, and savings in logistics, and supply chain, are potential upsides to this venture.

Potentials in property development 

Scientex has purchased 26.4 hectares of freehold land in Rawang. The land is located in the greater Klang Valley region and costs RM85 million. The purchase will only be completed in the first half of 2018. With the addition of the Rawang land, Scientex’s land bank now stands at 1,093 hectares (as at August 2017) and is able to sustain the company for 10 to 15 years.

There are a couple of housing development which will be unveiled in FY2018 for bookings. These projects are located in Durian Tunggal, Melaka (197.4 acres) and Kulai, Johor (121.2 acres).

With many high end developments slowing down, the affordable housing segment, which has been the main thrust of Scientex, continues to enjoy breeze sales due to high demand and affordable pricing. Having survived the general slowdown in the property market in 2017, I expect the property market, in 2018, to be kind to Scientex due to a good mix of affordable housing along with other premium developments.

Conclusion

Scientex is appealing, in my opinion, for the following reasons:

  1. It has a strong reputation and achievements in the plastic packaging industry, especially in the industrial packaging segment.
  2. It is expanding its consumer packaging segment, especially in the BOPP production.
  3. Strong presence in property development with a focus on affordable housing.
  4. Strong access to new packaging and plant technology from Japan and Germany.
  5. Keeping up with reinvestment, by modernising and expanding plants, and replenishing land bank.

I find Scientex unattractive for the following reasons:

  1. US expansion is a big gamble considering that, in my opinion, it has been a market in which they have neglected thus far.
  2. Its expansion and modernisation of plants and equipment may endure a gestation period of a couple of years before there can contribute positively to earnings.
  3. Profit margin in the manufacturing business is already tight even in an environment of low crude oil prices.
  4. Scientex’s share price is selling at a premium. Its fair value, from my calculation (which may well vary yours), is within the range of about RM7.40 – RM7.60 per share.

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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. Scientex website
  2. Scientex FY 2016 Annual Report
  3. Scientex Q4 FY 2017 Report
  4. https://en.wikipedia.org/wiki/Stretch_wrap
  5. https://vimeo.com/147704702
  6. http://www.thestar.com.my/business/business-news/2016/11/11/scientex-to-build-rm107mil-stretch-film-plant-in-arizona/
  7. https://www.thestar.com.my/business/business-news/2016/11/10/scientex-to-invest-us$25m-for-stretch-film-plant-in-us/
  8. https://www.thestar.com.my/business/business-news/2017/03/24/scientexs-us-bet/
  9. https://themalaysianreserve.com/2017/06/21/scientex-plans-double-packaging-plant-capacity/
  10. http://www.theborneopost.com/2016/09/30/scientex-starts-operations-of-malaysias-largest-bopp-film-manufacturing-plant/
  11. http://www.thestar.com.my/business/business-news/2017/08/09/scientex-boost-landbank-with-rawang-tract/