PSC Corporation - KGI Securities 2022-05-10: A Defensive Play Amidst Inflation


PSC Corporation - A Defensive Play Amidst Inflation

  • Fuelled by the packaging segment, PSC Corporation (SGX:DM0)’s top line grew by 13.1% y-o-y in FY21. However, the overall bottom line declined by 9.7% y-o-y, due to lower other income and higher costs.
  • In December 2021, PSC announced the acquisition of C.K.H. Food Trading Pte Ltd and 123 Mart Pte Ltd. The acquisition is effective 1 January 2022 and will open up more distribution channels for the company and is expected to drive the consumer segment revenue.
  • Despite the decline in the consumer segment revenue, the packaging segment revenue grew substantially, driven by higher sales volumes in both Singapore and China. The increase in average selling price from Singapore’s operations also contributed to higher revenue. However, the underperformance of the consumer segment was due to the high base in 2020, as there was higher demand for essential products like rice and paper during the lockdown period in Singapore.
  • We maintain PSC Corporation with a NEUTRAL rating but raised our target price to S$0.45 from S$0.42, based on an unchanged 11x P/E pegged to FY22F EPS.

FY21 financials review.

  • PSC Corporation’s revenue jumped by 13.1% y-o-y to S$533.3mil in FY21, however, net profit after tax declined by 9.7% y-o-y to S$29.9mil. This was due mainly to a decrease in the one-off government grants and higher expenses such as labour costs.
  • PSC Corporation's FY21 gross profit margin stood at 21.2%, a decrease of 2.1 percentage points compared to the previous period. Meanwhile, the net profit margin declined from 7% in FY20 to 5.6% in FY21.

Inorganic acquisitions to spur growth.

  • In December 2021, PSC announced the acquisition of 40,000 ordinary shares or 80% of the issued and paid-up share capital of C.K.H. Food Trading Pte Ltd and 123 Mart Pte Ltd for a total consideration of S$3.3mil. The acquisition is effective 1 January 2022. C.K.H. is a leading food distributor which supplies a wide variety of food products close to 1,500 establishments including wholesalers and e-commerce platforms such as Shopee, Lazada and Qoo10. Meanwhile, 123 Mart is a budget-friendly grocery minimart.
  • PSC Corporation’s acquisition of C.K.H and 123 Mart will expand the company’s distribution channels, improve economies of scale and overall bring synergy to the business.

Stable outlook.

  • We expect the consumer segment revenue to grow by 2.5% y-o-y in FY22, mainly driven by the acquisition of C.K.H. Food Trading Pte Ltd and 123 Mart Pte Ltd. The forecast is relatively conservative as livelihood is normalizing back to pre-pandemic levels and consumption of consumer goods will likely be less robust compared to a high base in 2020.
  • Singapore has lifted almost all dining and cross-border restrictions and as such, the demand for household consumer goods will likely plateau. The Retail Sales Index in 1Q22 remained relatively higher compared to pre-COVID levels, even though correcting significantly from the high base in 2020. Moving forward, inflationary pressures from higher food costs, packaging and logistics will likely be the driving factors for higher upstream prices. Higher average selling prices are expected to buoy the overall top line for the consumer segment.
  • PSC Corporation’s packaging business is the main growth driver of the company and revenue grew 21.3% y-o-y to S$367.4mil in FY21. Packaging business made up 62.6%/64.3%/68.9% of total revenue in FY19/20/21, commanding a greater share of revenue y-o-y and offsetting the decrease in revenue from the consumer segment. We maintain the same 5% y-o-y top-line growth rate as our previous forecast, which is a conservative estimate compared to the 21.3% y-o-y growth in FY21, considering the possible headwinds which the company will face moving forward.
  • Our gross profit margin forecast for PSC Corporation is adjusted downwards to 21.2% for FY22 and beyond, in line with FY21 actual results.

Valuation & Action:

Megan Choo KGI Securities Research | https://www.kgieworld.sg/ 2022-05-10
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.45 UP 0.42