• 1Q18 revenue was in-line with expectation but earnings missed on costs pressures
• Expect full integration and commencement of Singapore factories at Woodlands Terrace by 3Q18; New capacity to boost product innovations and margins
• Maintained Buy with unchanged DCF-derived TP of S$0.98

The positives

• Signature puff products continue to gain traction, 12% YoY on new stores and new puff flavours. Puff products remained the major contributor to its revenue, accounting for c.33.6% of the Group’s 2Q17 revenue. Product innovations drove higher sales from mature stores. We expect five new stores in the pipeline, bringing OCK to a total of 92 outlets by end-FY18.
• Integration of Woodlands Terrace is on track to complete by 3Q18. The newly reconstructed factory at 2 Woodlands Terrace had received its TOP in mid-July, and is being equipped with advanced facilities and equipment.

The negatives

• Higher raw material costs and operating expenses eroded margins. Management noted costs pressures arising from higher prices for two of its main raw materials, i.e. chicken and seafood*. Higher staff costs on salary adjustments while rental expenses increased on more new stores. The rental cost in key sites where OCK operates, such as MRT stations and suburban malls, remain elevated.

*Chicken prices and squid prices increased c.6% and c.1% YoY respectively in 3Q17 (Source: CEIC)

Outlook

Near-term headwinds but positive on the long-term outlook. New stores opening and product innovations will continue to drive topline growth. We revised our FY18e earnings lower by c.19% to account for higher raw material costs, and we do not expect selling prices to be raised to offset this. We also trimmed FY18-20e earnings by c.1-2% to account for the gestation period in the United Kingdom. Nonetheless, we are optimistic that the new factory will yield manufacturing efficiencies and new product offerings.

Maintained Buy with unchanged DCF-derived TP of S$0.98

The completion of its reconstruction work in 2 Woodlands Terrace and integration with the adjacent 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.