KUCHING: Kim Teck Cheong Consolidated Bhd’s (KTC) expansion efforts into Sarawak are proving to be successful as the group’s latest net earnings figures for the first nine months of 2017 (9M17) showed a 98 per cent expansion to RM1.9 million.
Following a previous 74 per cent year over year (y-o-y) decline in its financial year 2016 (FY16) earnings to RM1.9 million from the RM7.1 posted in FY15, the group’s earnings are picking up as its 9M17 earnings have already surpassed FY16’s full year earnings of RM1.9 million.
According the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the positive deviation included a 28 per cent y-o-y growth in revenue to RM311.7 million was thanks to a greater contribution from its activities in Sarawak.
To recap, the group who predominantly operates in Sabah had in January 2016 acquired Popular Trading (Borneo) Corporation Sdn Bhd to leverage on its existing presence and network in Sarawak’s distribution scene.
The move to expand operations in Sarawak and capture the local consumer packaged goods (CPG) market was further supplemented through a 100 per cent acquisition of Trans Pain Sdn Bhd to expand its local warehousing facilities.
Additionally, the group’s appetite for expansion was not limited to Sarawak as the group has acquired a 60 per cent stake in Grandtop Marketing Sdn Bhd which has a sizeable sales and distribution network in Brunei, further enlarging the group’s outreach.
While these ambitious acquisitions are starting to bear fruit, the research arm notes that they were also the primary cause of shrinking earnings in periods after KTC’s initial public offering back in November 2015 and warns that it would be some time before margins are normalised.
“We reckon the eroding earnings despite strong sales growth is caused by the group’s gestation phase from its newly acquired Sarawak operations. Given time, we believe margins could normalise in the near term as the larger group operations become more streamlined.
“We estimated FY17E to close with RM417.7 million sales (+22 per cent y-o-y) with an EBITDA of RM16.2m (+61 per cent y-o-y) arising from the recovery in margins of 3.9 per cent y-o-y as a result of better operational efficiency.
“For FY17E’s net profit, we estimate a 54 per cent y-o-y increase to RM2.9 million and towards FY18E, we believe sales could potentially grow at 13 per cent to RM472.0 million on the back of larger contributions from Sarawak.”
While the research arm has high expectations for TCK, they note that the group will still need to increase their synergy of its distribution network on Sarawak and Brunei footprints in order to achieve the same economies of scale as seen in their core Sabah operations prior to its recent aggressive expansions.
With that being said, the research arm is closing their position on KTC with a ‘not rated’ call with a forward valuation of RM0.275 at a 14.0 fold price earnings ratio (PER).
“Current valuations suggest that the prospects for recovery may have already been priced in,” the research arm justified.
At present, KTC possesses the rights to distribute Proctor & Gamble products, Anakku diapers and Marigold milk brands.