Old Chang Kee Ltd. - Phillip Securities 2017-08-17: New Facilities To Commence 3Q18

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OLD CHANG KEE LTD. 5ML.SI

Old Chang Kee Ltd. - New Facilities To Commence 3Q18

• Old Chang Kee (OCK)'s 1Q18 revenue was in-line with expectation but earnings missed on costs pressures.
• Expect full integration and commencement of Singapore factories at Woodlands Terrace by 3Q18; New capacity to boost product innovations and margins.
• Maintained Buy with unchanged DCF-derived TP of S$0.98.

The positives 

• Signature puff products continue to gain traction, 12% YoY on new stores and new puff flavours. Puff products remained the major contributor to its revenue, accounting for c.33.6% of the Group’s 2Q17 revenue. Product innovations drove higher sales from mature stores. We expect five new stores in the pipeline, bringing OCK to a total of 92 outlets by end-FY18.
• Integration of Woodlands Terrace is on track to complete by 3Q18. The newly reconstructed factory at 2 Woodlands Terrace had received its TOP in mid-July, and is being equipped with advanced facilities and equipment.

The negatives 

• Higher raw material costs and operating expenses eroded margins. Management noted costs pressures arising from higher prices for two of its main raw materials, i.e. chicken and seafood*. 
• Higher staff costs on salary adjustments while rental expenses increased on more new stores. 
• The rental cost in key sites where OCK operates, such as MRT stations and suburban malls, remain elevated.

*Chicken prices and squid prices increased c.6% and c.1% YoY respectively in 3Q17 (Source: CEIC)

Outlook 

Near term headwinds but positive on long-term outlook. 

• New stores opening and product innovations will continue to drive topline growth. We revised our FY18e earnings lower by c.19% to account for higher raw material costs, and we do not expect selling prices to be raised to offset this. 
• We also trimmed FY18-20e earnings by c.1-2% to account for the gestation period in the United Kingdom. 
• Nonetheless, we are optimistic that the new factory will yield manufacturing efficiencies and new product offerings.

Maintained Buy with unchanged DCF-derived TP of S$0.98 

• The completion of its reconstruction work in 2 Woodlands Terrace and integration with the adjacent new factory by 3Q18 would be the inflection point for OCK. 
• We remain upbeat that its new factory facilities will increase capacity to fuel their expansion domestically and regionally

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2017-08-17

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