OTS Holdings - SAC Capital 2021-09-02: Home Grown Branded Food Vying For The Region

OTS HOLDINGS LIMITED (SGX:OTS)

OTS Holdings - Home Grown Branded Food Vying For The Region

Established in 1994, OTS produces and sells ready-to-eat and ready-to-cook meat products under house brands such as “Golden Bridge” and “Kelly’s“ in SE Asia. The products are available in four formats: chilled, frozen, dried and shelf-stable, and sold in supermarkets and convenience stores, through wholesalers and e-commerce platforms, and to the foodservice sector.

OTS Holdings (SGX:OTS) is a meat product manufacturing company. Its products are ready-to-eat (RTE) and ready-to-cook (RTC) and grouped into four types: chilled, frozen, dried and shelf-stable. The RTE and RTC food categories are gaining popularity with smaller household size and pursuit of convenience and ease of preparation. The shelf-stable products are also preferred for easy storage and longer shelf life.
OTS carries more than 1,100 SKUs across 13 main product types under 6 house brands, catering to both halal and non-halal consumer segments. OTS also produces seasonal food products such as roast meats, hams and pork knuckles during festive periods such as Chinese New Year and Christmas.

OTS's retail brands are “Golden Bridge”, “Kelly’s” for non-halal products, and “El-Dina” for halal products. For the foodservice sector, the products are sold under house brands “GoldenLion” and “Orcid” for non-halal, and “Kizmiq” for halal items.
The products are sold in major supermarkets, convenience stores, provision shops, hotels and restaurants in Singapore shelf life.

OTS sells through all channels, broadly classified as modern trade, general trade, foodservices and others.
- Modern trade consists of supermarkets and hypermarts, such as NTUC and Sheng Siong Indonesia and the EU. The EU-Singapore free trade agreement, effective Nov 2019, removes tariffs on certain Singapore products exported to EU over 3 to 5 years (by Nov 2024). The UK has a similar agreement effective 1 Jan 2021. OTS’s plants are 2 out of 3 meat processing plants in Singapore that have obtained approval to export meat products to the EU.

COVID-fuelled pantry flow generated from operations was S$7.1m, or S$0.033/share. With S$7.7m raised from the IPO in Jun 2021, OTS's net cash at Jun 21 amounted to S$11.5m (or S$0.054/share). ROIC was 20.1%, well ahead of the Singapore listed branded food producers.
We expect sales to grow by 32% in FY2022 (Jun) as channel inventory at the modern and general trade in Singapore normalizes and re-stocking resumes, and demand from food service operators grow with greater relaxation of dine-in and tourism. A higher vaccination rates in the regional markets could see a rebound in economic activities. With high operating leverage, we expect EBITDA margin to rise by 0.6ppt to 15.7% and net margin to recover to 10.3% (FY21: 7.8%).

The headwinds were:
1. Singapore’s stockpiling chain bottleneck held back marketing push into the overseas markets.
OTS's FY21 NPAT grew 9.6% if we stripped out wage grant and IPO expenses.

OTS's growth drivers are
1. Greater market penetration into Malaysia, the Philippines and Indonesia as pandemic trend towards healthier lifestyle.

Despite its smaller size, latest ROIC of 20.1% is comparable with peers (Hormel 18.3%, Shanghai Maling 23.3%, Danish Crown 7.1%). EBIT margin of 10.8% is slightly lower than Hormel’s 11.5%, but above Maling’s 4.4% and Crown’s 4.5%.

Branded food companies command a premium taking into the Singapore listed branded consumer companies.
See
We arrived at an equity value of S$86m or S$0.401 per OTS share on DCF at cost of equity of 10.9% and a terminal growth rate of 3%. At this valuation, the forward PER is 16.3x and 15.3x for FY22E and FY23E, respectively. EV/EBITDA is 9.6x and 8.6x for the two years.

Peggy Mak SAC Capital Research | https://www.saccapital.com.sg/ 2021-09-02

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