CIMB Research starts coverage of CCK with Add rating

CIMB Equities Research has initiated coverage on CCK Consolidated Bhd with an Add rating and a 12-month target price of RM1.28. CCK controls about 35% of Sarawak’s poultry market making it the state’s biggest producer. Besides Sarawak, it also has exposure in the poultry markets of Sabah and Indonesia (Jakarta and Pontianak). The group also operates 57 retail outlets, mainly located in its captive market, East Malaysia.

CIMB Research said the target price of RM1.28 was based on 15 times CY18F price-to-earnings (P/E), a 30% discount to CIMB Malaysia’s consumer sector target P/E of 21.6 times. 

“The current valuation of 8.8 times CY18F P/E is a 18.5% discount to the stock’s five-year historical mean of 10.8 times. Institutional shareholding is low at less than 0.3% (end-2016). Downside risks to our call are sharp decline in poultry prices and spike in raw material costs,” it said.

CCK’s key advantage is its retail arm and strong branding. While its peers have limited or no retail exposure, all its poultry products are sold through its strategically located stores.

The research house said this further complements its integrated supply chain, as shown by its better margins due to stronger pricing power.

In contrast, its peers rely on third-party distributors and their selling prices are dependent on supply-demand dynamics. Having a retail unit also alleviates oversupply concerns as any excess supply can be absorbed.

Malaysia ranks fourth globally in terms of poultry consumption per capita. Demand for poultry goods in the country is set to rise, thanks to population growth and urbanisation, especially in East Malaysia.

“CCK stands to be a key beneficiary of these macro trends as it has a monopoly in Sarawak. Expansion of F&B chains and new mall openings should translate to higher demand for its products, in our view. CCK is also expanding capacity across its integrated supply chain to cater to the expected demand growth.

“We are of the view that the company is undervalued as the market has overlooked its key advantages such as: i) its wide distribution network of 57 self-owned retail outlets, leading to superior margins vs. its peers; ii) captive market in East Malaysia, with stronger-than-average demand growth spurred by urbanisation; and iii) stronger pricing power, leading to less cyclical and volatile earnings unlike its peers.