• Strong 9M18 revenue met 78% of our full year FY18e expectation
• Earnings missed on costs pressure and assets write off, forming 64% of FY18e estimate
• Investment thesis remains intact: Expanded factory space and factory equipment to provide new capacity to boost product innovations and enhance margins from 3Q18 onwards
• Maintained Buy with unchanged DCF-derived TP of S$0.98

The positives

• Revenue set to grow at high single digit percentage in FY18e. 9M18 Revenue growth accelerated to 8.7% YoY from 8.2% in 1H18. Strong momentum from retail outlets (+8.7% YoY) in 3Q18, driven by contribution from new outlets and higher same store sales growth. In addition to a retail sales recovery backdrop, the strong sales also reflected the Group’s continues effort to innovate new products to stimulate demand.
• Inorganic growth via new stores. Total store count in Singapore increased to 92 outlets as at end-3Q18 from 88 outlets a year ago. 7 new stores were opened (two stores in Changi Airport Terminal 4, and one store each in SingPost Centre, Ang Mo Kio MRT, Suntec City Mall, and Northpoint City). It has also closed two underperforming stores (at One KM Mall and Bedok Point) upon their lease expiration.

The negatives

Margins pressure from :

1. Higher raw material costs. Higher prices for chicken meat (+1.2% YoY) and cooking oil (+2.3% YoY) during the period. (Source: CEIC)
2. Change in product mix. Puff has the highest margin. However, puff sales were down 8% YoY, mainly due to its promotion of “buy any 4 items and free 1 puff” in Nov-17. The promotion, which allowed purchase of lower margin items with a higher margin product free, has ceased in Dec-17. We expect the Group to review its pricing and promotional strategies in conjunction with the impending GST hike.
3. One-off non-cash assets write off due to two outlet closures in 3Q18. S$0.253mn was written off due to the outlet closures. This was partially offset by S$0.06mn gain on disposal of property, plant and equipment.
4. Start-up costs amounted to S$0.07mn in 9M18. The Group’s first flagship outlet in central London, United Kingdom is on track to open in 2018. With only one store, we do not expect it contribute significantly to the Group’s bottom line in near term, and could take a longer than usual period to breakeven compared to a new store in Singapore, where it has strong presence in.

Outlook

Near term headwinds but positive on long-term outlook. New stores opening and product innovations will continue to drive topline growth. The new factory will increase production capacity (in terms of variety and volume) to fuel their expansion strategy, and improve its margins via (a) enhanced manufacturing efficiencies and (b) cost savings from bulk purchasing. 

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

We have increased our FY18e sales growth expectation to 7.2% YoY from 4.2%. However, we have also trimmed our FY18e/19e gross margins by 20bps/5bps to 61.5%/63.0% respectively. Our investment thesis remains intact – successful integration with the adjacent new factory would be the inflection point for OCK.