• Results in line with our forecasts. 9M FY17 Revenue/NPAT met 76%/75% of our FY17 full year forecast.
• Turnaround in sight and materialising its growth strategy. 9M FY17 NPAT -0.9% yoy growth.
• Maintain our view of 2.8% yoy growth in FY17 NPAT after two consecutive years of contraction, with gross margin sustaining at c.63%.

Results at a glance

Expansion in distribution channel and product range should continue to lift sales. Sales from retail outlets increased 7.0% year-on-year (“yoy”) in 3Q FY17,  driven by:

• Contribution from more outlets. Total number of outlets increased to 88 by end December 2016 from 82 a year ago. The new outlets at Tampines Hub (Nov-16) and Smart Energy Serangoon Petrol (Jan-17), as well as the reopening of revamped Novena Square outlet (Feb-17) would lift sales in 4Q FY17.
• Higher turnover from new flavours of puffs. Puffs remained as its major contributor to its revenue, accounting for c.33% to its total revenue in both 3Q FY17 and 9M FY17. Sales for puffs increased c.12% yoy in both 3Q FY17 and 9M FY17.

The results reflect Old Chang Kee’s (“OCK”) successful implementation of its strategy which has started to bear fruits, in our view. Its move to build two new factory facilities in 4 Woodlands Terrace and Iskandar Malaysia to increase its production capacity and enhance economies of scale has driven margin expansion.

• As promised, it has ramped up its pace of innovation. We saw a continuous stream of new products and new flavours of puff introduced since 2Q FY17. We remain upbeat that these new products and flavours of puff will boost sales, bringing full year Revenue/NPAT yoy growth to 4.9%/2.8%. Revenue grew 5.3% yoy in 9M FY17 with NPAT flattish at -0.9% yoy.

• Improved factory efficiency lifted 2Q FY17 gross margin by 1.2 percentage points (“pp”) yoy to 63.8%, while 9M FY17 gross margin maintained above 63%. We think that gross margin could sustain at c.63% for the rest of FY17.

Maintained ‘Buy” rating and DCF-derived TP of S$0.98

The completion of its reconstruction work in 2 Woodlands Terrace in 1Q FY18 and integration with the adjacent new factory would be the inflection point for OCK. We expect better earnings by 2Q FY18, on the back enhanced manufacturing efficiencies, and introduction of new product offerings with better margins.

We remain upbeat that its new factory facilities in Singapore and Malaysia would bode well with its expansion strategy to grow domestically and regionally. Strategy execution remains the main risk.

Appendix

In our intiation report, we have mentioned OCK’s intention of moving into bigger space to accommodate a seating area for dine-in customers. The move enables OCK to increase its avenues to sell Ready Meals to its customers.

As mentioned, opportunities prevailed during the recent mall refurbishments drive – one of the example is Novena Square Outlet, which was reopened in February 2017.

Renovated Novena Square Outlet with New Dine In Concept and New Menu

New Product launched in January 2017

New Flavour launched in February 2017

Source: Old Chang Kee Singapore’s Facebook Page