• Inorganic and organic growth through new stores and higher same store sales.
• Integrated factory to widen range of product offerings and improve margins.
• Completion of factory redevelopment targeted for 1QFY18F, with tapering of CapEx thereafter.
• Improved free cash flow profile post-consolidation could lead to higher dividends.
• Initiate with “Buy” rating and 98 TP, implying a 42% upside.

Company Background

Old Chang Kee Ltd (“OCK”) is principally engaged in the manufacture and sale of Halal- certified food products of consistent quality under the brand name “Old Chang Kee”. Its signature product is the well-known Old Chang Kee curry puff which was launched in 1956. It currently has more than 30 food products. It has also introduced the sale of breakfast items and local delights meals at selected retail outlets. Its food products are sold through its retail outlets, mostly on a takeaway basis. The Company also owns other subsidiary brands such as Take 5, Curry Times, Bun Times, Mushroom Cafe, and Dip ‘n’ Go.

The home-grown snacks chain was listed on the Singapore Exchange – Catalist board on 16 Jan 2008, with an Initial Public Offering (“IPO”) of 25 million new shares at S$0.20 each.

Investment Merits

1. Higher volume sales and margins expansion due to wider product lines with better margins. OCK has recently completed two new factory facilities in 4 Woodlands Terrace and Iskandar Malaysia. It is currently reconstructing its original factory facility in 2 Woodlands Terrace. These new factory facilities will provide the necessary production space for new product offerings, increase productivity and enhance operating efficiencies. The new product offerings should help to bump up same store sales growth, while improved margins lift bottom line. We expect earnings to grow 8.9% CAGR over the next three years, i.e. FY19F PATMI to surge 29% from FY16.
2. Increasing store count to capture the growing demand for ready food. Rising consumer affluence has increased Singaporeans’ tendency to dine-out. The demographic change should support the demand for OCK’s new product offerings. OCK has 77 conveniently-located retail outlets island wide to reach out to its customers. We think that OCK has yet to reach market saturation and favourable macro environment offers OCK opportunities to increase its store count.
3. Track record of paying dividends, with possibility of higher dividend payout after capital expenditure (“CapEx”) tapers off. FY16 dividend payout was 6.0 cents, including a one-off special dividend of 3.0 cents. After the completion of factory reconstruction project in 1QFY18F, we do not expect any significant CapEx. Hence, we believe the growing free cash flow from FY18F onwards could potentially lead to higher dividend payout at 4.0 cents in FY19F.
4. Competitive advantage of (i) perceived product differentiation through a trusted brand, and (ii) operating scale and technical skills, are difficult for competitors to replicate. Its Halal-certification helps to enlarge its customer base and paved the way for its expansion into Malaysia and Indonesia.

Initiate coverage with “Buy” rating with a target price of S$0.98

We expect earnings to grow 8.9% CAGR over the next three years, following the consolidation of factory, realisation of manufacturing efficiencies, and new product offerings. Current forecasted FY17F dividend of 3.0 cents gives an implied forward yield of 4.5%. We initiate coverage on OCK with “Buy” rating and DCF valuation of S$0.98. This implies an upside of 42% (with dividend) from its last done price.

Investment Thesis

– Additional product lines at better margins to drive earnings

1. Old brand, new strategy to drive up both top- and bottom-lines
2. Growing demand for takeaway and convenience foods should propel OCK’s new strategy
3. Increasing store count to capture growing demand
4. Increasing free cash flows can sustain dividend payout above 60%, which could translate to 5.6% dividend yield from FY19F onwards
5. OCK enjoys few economic moats which its competitors cannot easily recreate or replicate

– Forecast Assumptions

1. SSSG and new stores to drive revenue at 4.2% CAGR over next three years
2. Improved margins to lift FY19F earnings growth to double digit
3. Maintaining negative cash conversion cycle
4. Dividend payout ratio to sustain above 60%

Valuation

We think Old Chang Kee will benefit from its expansion plan backed by strong cash position.

1. OCK’s capacity expansion plan bodes well with its strategy to boost demand. New product offerings should improve its product mix by selling higher margin product lines. The new production facilities using state-of-the-art machinery would improve productivity as well as operating efficiencies.
2. Top line should catch up with its higher depreciation and amortisation expenses post FY18F.
3. Growing store count underpinned by favourable macro environment.
4. Potentially higher dividend payout, which could translate to c.5.6% yield post FY18F.

We initiate coverage on OCK with a “Buy” rating with a target price of S$0.98 based on discounted cash flow (DCF) methodology. This implies an upside of 42% (with dividend) from its last done price.

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