SINGAPORE (Aug 21): Phillip Capital is maintaining its “buy” call on Old Chang Kee as it expects the group’s newly constructed factory which will be commencing in 3Q18 to yield manufacturing efficiencies and new product offerings.
Located at 2 Woodlands Terrace, the new factory has received its TOP in mid-July and will be equipped with advanced facilities and equipment.
Meanwhile, Old Chang Kee’s signature puff products continue to gain traction and remains to be the major contributor to its revenue, accounting for 33.6% of the group’s revenue for 1Q18.
See: Old Chang Kee posts 28% drop in 1Q earnings to $0.7 mil
Despite a drop in its earnings, the group’s product innovations also drove higher sales from its more matured stores.
In a Wednesday report, analyst Soh Lin Sin says, “We expect five new stores in the pipeline, bringing OCK to a total of 92 outlets by end-FY18.”
However, the management noted that higher raw material costs – chicken and seafood – as well as higher staff cost and increased rental expenses on more new stores have eroded its margins.
According to the analyst, the group will face some near-term headwinds due to the higher raw material costs and raised selling prices are not expected to offset this, but Soh continues to have a positive outlook on the group for the long-term.
“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,” says Soh.
The analyst remains upbeat that the group’s new factory in Woodlands will help increase capacity for local and international expansion.
Shares in Old Chang Kee are trading at 78 cents as at 3.03pm.
