Old Chang Kee Ltd. - Phillip Securities 2017-12-18: Spicing Up Growth

Old Chang Kee Ltd. - Phillip Securities 2017-12-18: Spicing Up Growth OLD CHANG KEE LTD. 5ML.SI

Old Chang Kee Ltd. - Spicing Up Growth

  • New factory and equipment to boost product innovations and margins from 3QFY18 onwards.
  • Near-term headwinds of integration costs and higher input costs in FY18e.
  • Potentially increase dividend payout post-CapEx in FY19e.
  • Maintain BUY with DCF-derived target price of S$0.98.


  • Old Chang Kee Ltd (OCK) manufactures and sells Halal- certified food products under the brand name “Old Chang Kee”, including its signature Old Chang Kee curry puff. 
  • The Company also owns other subsidiary brands such as Take 5, Curry Times, Bun Times, Mushroom Cafe, and Dip ‘n’ Go.


1. Three-pronged growth strategy: 

  1. Continues to expand its store network locally. Contribution from new outlets and higher same-store sales growth should underpin topline growth. As at 30 Sep-17, it has 87 outlets, 10 net new stores as compared to Nov-16. We expect 5 net new stores by 2H FY18 (Oct-17 to Mar-18), bringing total store count to reach 92 by end-FY18.
  2. Puff innovations to spur sales and change of sales mix to drive margin. Puff products are the major revenue contributor (c.30% of sales), and new puff flavours are the key revenue growth driver. Introduction of new flavours could translate into 1-3% of revenue growth. Meanwhile, OCK Ready Meals (e.g. Curry Chicken Rice/Loaf/Bee Hoon or Sambal Fish Cutlet Rice) yield higher margins compared to the other products. The new factory provides new c.60% additional production area to boost product innovations and enables change of product mix.
  3. Enhance productivity and operating efficiency. The new factory is equipped with advanced machinery and additional capacity. Following the commissioning of new factory equipment in 2Q FY18, production has now stabilized with a higher production capacity and efficiency. Majority of the factory integration is completed and is on track for full integration by 3Q18.

2. Near-term headwinds but positive on the long-term outlook. 

  • Integration costs, coupled with higher raw material costs eroded FY18e gross margin. The Group is currently reviewing its pricing and promotional strategies. 
  • We are cautiously optimistic that a more favourable pricing, coupled with the margin gains from its new factory, should mitigate the increasing cost pressures. We expect lower gross margin at 62.5% in FY18e, compared to its 63% level in FY16-17.

3. Possibility of higher dividend payout, after CapEx tapers off. 

  • We do not expect any significant CapEx in near-term after the reconstruction work in its new factory. Hence, we believe the growing free cash flow post FY18e could potentially lead to higher dividend payout. 
  • We estimated a 5.2% dividend yield in FY19e.


  • Maintain BUY with DCF-derived target price of S$0.98. 
  • New store openings and product innovations will continue to drive topline growth. Successful integration of the 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/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 0.980 Same 0.980