SINGAPORE (May 31): Phillip Securities is keeping Old Chang Kee at “buy” given the curry puff and fried snacks seller continues to pay out more than 90% of its earnings in FY19, supported by increasing free cash flows.
“We expect FY19E dividend to increase by 1 cent to 4 cents as free cash flows improve from $1.6 million in FY18 to $5.2 million,” says Phillip analyst Soh Lin Sin in a Thursday report.
Soh says the opening of new stores and product innovations will continue to drive topline growth. Old Chang Kee’s new factory will increase production capacity -- in terms of variety and volume -- to fuel their expansion strategy, and improve its margins via enhanced manufacturing efficiencies and cost savings from bulk purchasing.
Soh says FY18 revenue growth is the strongest in the past five years, mainly from underlying sales growth. Sales from retail outlets were up 9.2% y-o-y, driven by the 8% y-o-y increase in average sales per store; and to a lesser extent, by the net one additional store count during the fiscal year in review.
See: Old Chang Kee's FY18 earnings double to $5 mil on improved margins & revenue growth
In addition, sales of puff were up 3.3% y-o-y, and remained as the major FY18 revenue contributor at 30%. “We believe these figures are a testament to the group’s successful product innovation,” says Soh.
In 4Q18, gross margin returned to roughly 63%; which Soh says should be sustainable after being depressed for the past three quarters. In April, average selling prices have been revised to pass on the higher raw material costs to consumers. Old Chang Kee also benefited from a more favourable input prices arising from bulk purchasing, on the back of expanded factory space.
“We have increased our FY19 sales growth expectation to 6.0% y-o-y from 4.1%,” says Soh, “We also introduce FY20 estimates. Core net profit is estimated grow by 21.6% and 22.8% in FY19E and 20E respectively as the group continues to ramp up its product innovation effort while deriving better operating efficiencies from its new factory facilities and equipment.”
Old Chang Kee is currently trading at 19% discount to its peers average of 28.1 times. Phillip’s target price of 98 cents implies a F19/FY20E P/E of 22.6 times and 18.5 times, respectively.
As at 4.22pm, shares in Old Chang Kee are down 0.5 cent at 75 cents.
