CIMB Research retains Add for CCK but lowers target price

CIMB Equities Research is retaining its Add recommendation for poultry company CCK Consolidated Bhd but lowered the sum-of-parts target price from RM1.09 to 98 sen.

KUALA LUMPUR: CIMB Equities Research is retaining its Add recommendation for poultry company CCK Consolidated Bhd but lowered the sum-of-parts target price from RM1.09 to 98 sen.

It said on Monday due to the more muted outlook ahead, it lowered its FY18-20F EPS by 20.9%-22.7% due to i) higher feed cost, ii) lower retail sales, and iii) higher labour costs.

“We value CCK at a CY20F P/E of 18.3 times, a 30% discount to our consumer sector average target P/E of 22.8 times for CY19F. Note that we rolled over our valuation to 2020F,” it said.

CIMB Research said since June, the ringgit has weakened vs. US$ by 4.9%. As CCK imports its poultry feed (65% of total costs) in US$, this has resulted in higher raw material prices. 

Despite the recent drop in prices of corn (3Q18: -12.3% on-quarter) and soybean (3Q18: -7.3% on-quarter), there is a two to three months’ time lag in passing through the lower prices. 

Hence, this is likely to negatively impact margins from its poultry segment in the short term.

“We estimate that CCK hiked its chicken and egg average selling prices by 2%-3% on-quarter in 3Q18. However, we gather that the quantum of the increase was insufficient to pass on the higher raw material costs. 

“Also, CCK has not recorded stronger sales post-Malaysia General Elections in May and zero-rating of GST on June 1. Instead, CCK believes most consumers have been spending more cautiously given the weaker economic outlook,” it said.

CIMB Research regarded the 19.5% rise in East Malaysia’s minimum wage to RM1,100/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%-40% of its total workforce (1,500) are currently paid below the new minimum wage. As such, we expect CCK’s labour costs to increase.

“By 1H19, CCK aims to open six stores, all of which will be located in East Malaysia. This will bring its total store count to 65 outlets. Also, it 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-4Q18F, with trial runs currently underway,” CIMB Research said.