Old Chang Kee Ltd - Phillip Securities 2016-11-04: Puffing up capacity and margins

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OLD CHANG KEE LTD. 5ML.SI

Old Chang Kee Ltd - Puffing up capacity and margins

• Inorganic and organic growth through new stores and higher same store sales.
• Integrated factory to widen range of product offerings and improve margins.
• Completion of factory redevelopment targeted for 1QFY18F, with tapering of CapEx thereafter.
• Improved free cash flow profile post-consolidation could lead to higher dividends.
• Initiate with “Buy” rating and SGD0.98 TP, implying a 42% upside.

Company Background 

• Old Chang Kee Ltd (“OCK”) is principally engaged in the manufacture and sale of Halal-certified food products of consistent quality under the brand name “Old Chang Kee”. Its signature product is the well-known Old Chang Kee curry puff which was launched in 1956.
• It currently has more than 30 food products. It has also introduced the sale of breakfast items and local delights meals at selected retail outlets. Its food products are sold through its retail outlets, mostly on a takeaway basis. The Company also owns other subsidiary brands such as Take 5, Curry Times, Bun Times, Mushroom Cafe, and Dip ‘n’ Go.
• The home-grown snacks chain was listed on the Singapore Exchange – Catalist board on 16 Jan 2008, with an Initial Public Offering (“IPO”) of 25 million new shares at S$0.20 each.

Investment Merits 

1. Higher volume sales and margins expansion due to wider product lines with better margins. OCK has recently completed two new factory facilities in 4 Woodlands Terrace and Iskandar Malaysia. It is currently reconstructing its original factory facility in 2 Woodlands Terrace. These new factory facilities will provide the necessary production space for new product offerings, increase productivity and enhance operating efficiencies. The new product offerings should help to bump up same store sales growth, while improved margins lift bottom line. We expect earnings to grow 8.9% CAGR over the next three years, i.e. FY19F PATMI to surge 29% from FY16.
2. Increasing store count to capture the growing demand for ready food. Rising consumer affluence has increased Singaporeans' tendency to dine-out. The demographic change should support the demand for OCK’s new product offerings. OCK has 77 conveniently-located retail outlets island wide to reach out to its customers. We think that OCK has yet to reach market saturation and favourable macro environment offers OCK opportunities to increase its store count.
3. Track record of paying dividends, with possibility of higher dividend payout after capital expenditure (“CapEx”) tapers off. FY16 dividend payout was 6.0 cents, including a one-off special dividend of 3.0 cents. After the completion of factory reconstruction project in 1QFY18F, we do not expect any significant CapEx. Hence, we believe the growing free cash flow from FY18F onwards could potentially lead to higher dividend payout at 4.0 cents in FY19F.
4. Competitive advantage of 
   1. perceived product differentiation through a trusted brand, and 
   2. operating scale and technical skills, are difficult for competitors to replicate. 
   Its Halal-certification helps to enlarge its customer base and paved the way for its expansion into Malaysia and Indonesia.

Initiate coverage with “Buy” rating with a target price of S$0.98 

• We expect earnings to grow 8.9% CAGR over the next three years, following the consolidation of factory, realisation of manufacturing efficiencies, and new product offerings. 
• Current forecasted FY17F dividend of 3.0 cents gives an implied forward yield of 4.5%. 
• We initiate coverage on OCK with “Buy” rating and DCF valuation of S$0.98. This implies an upside of 42% (with dividend) from its last done price.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-11-04

Phillip Securities SGX Stock Analyst Report BUY Initiate BUY 0.98 Same 0.98