Old Chang Kee

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As stated in my earlier post, Old Chang Kee trailing dividend yield was at 3.45% on 12 March 2017. It isn’t a very high yield (esp. as compared to the business trusts and REITs). So you may be scratching your head, wondering why I put this in the ‘dividend’ stock list.

However, in an environment of rising increase rates, whereby the normal yield of stocks is hovering around 2% to 3%, a 3.45% trailing dividend yield is actually not too shabby. In 2016, its dividend yield was a good 6.9%. And that is not excluding the rise in the share price since 2009.

Over the past 8 years, since 2009 to 2016, Old Chang Kee has distributed an average annual dividend totaling around 31 cents per share (including Special Dividend Payout). The Group does not have a fixed dividend policy but has paid dividends every year since it was listed.

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Base on the charts above, the payout and yield aren’t exactly trending in a linear straight line, but there is an overall upward trend nevertheless.

The recent TTM Payout Ratio is only 73.7%.

In addition, the company’s shares are up approx. 470% from 1 Jan 2009 to its closing price of $0.87last Friday (17 March 2017). In comparison, the capital gain returns of the SPDR STI ETF was approx. 80% for the same duration.

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Old Chang Kee has been around since 1956, growing from a single stall outside Rex Cinema to 80 outlets as of the financial year ended 31 March 2016 (FY2016). Tt is a not a big listed company, with an enterprise value of only S$97.8M.

However, there are many merits from this small company, besides the above average dividend yield.

In terms of business model, it is one of the simplest one, I can find. Seriously, it is such a small and simple company:

  • Their signature curry puff is sold at their outlets together with over 30 other food products including fish balls, chicken nuggets, and chicken wings.
  • Most of their sales are on a takeaway basis and their outlets are located at strategic locations to reach out to a wide range of consumers.
  • The Dip ‘n’ Go retail outlet offers delicious food on the go, with a variety of dips to go with.
  • Bun Times retail outlets offer Hainanese inspired buns.
  • The “Curry Times”, “Take 5” and “Mushroom” dine-in retail outlets carry a range of local delights such as laksa, mee siam, nasi lemak, and curry chicken.

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The business model as compared to most full-service F&B companies is less capital intensive. Although they have dine-in retail outlets, most of their sales are from a takeaway basis.

So yes, besides the normal low expenses of not having to hire highly skilled and paid staffs (most of them are above 45-year-old aunties), the company does not have to fork out a high rental for large areas (seating areas + kitchen).

2-in-1 concept stores improve efficiency (extract from this article)

The 2-in-1 concept combines an Old Chang Kee store with one of its sub-brands. Its first 2-in-1 concept store was launched in 2013, in Alexandra Retail Centre, with Old Chang Kee sharing the premise with Curry Times Tingkat. The 2-in-1 concept optimizes manpower and resources (store space and kitchen area), especially when both OCK and Curry Times have different peak hours.

 

To me, it is one of the few stocks which have both yield and strong fundamentals. Growth has faltered in recent years but there are plans for future growth.

 

Growth

The Retun on Assets, Return on Equity and Return on Invested Capital all have been trending downwards over the years. However, nevertheless, the recent TTM ROE and TTM ROIC are 15.26% and 12.58% respectively. Still reasonably good.

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In the recent 3rd quarter results repor, the following was stated:

  • The Group’s revenue showed an increase of approximately S$1.4 million or 7.5%. (3Q2017 vs 3Q2016)
  • The Group’s profit before tax increased from approximately S$1.5 million in 3Q2016 to approximately S$1.7 million in 3Q2017, an increase of approximately S$158,000 or 10.5%.
  • The Group expects operating lease expenses (rental) and labour and raw material costs to remain high in the next reporting period and the next 12 months and believes that the labour market will continue to remain tight. Retail conditions will continue to be challenging amidst mall revamps and with new entrants in the food and beverage market.
  • The Group believes that its new factory in Singapore when completed and fully operational in the later part of 2017, together with its Malaysia factory, will provide the platform for the Group to grow its business both locally and regionally while keeping the cost under control.

With regards to the last point, this article by Phillip Securities gives a more detailed write-up on the expansion potential:

“The Group acquired two factory facilities, in Iskandar Malaysia and 4 Woodlands Terrace Singapore (“New Factory”, adjacent to its original factory facility at 2 Woodlands Terrace), in Aug 2011 and Aug 2012, respectively. The construction works for both new factory facilities have been fully completed during FY16 and have commenced operations.

Currently, the Group is undertaking reconstruction works for its original factory facility at 2 Woodlands Terrace, and is expected to complete in June 2017 (1QFY18). When the reconstruction is completed, it will be fully integrated with the adjacent New Factory.

The integrated factory facility at 2 and 4 Woodlands Terrace will feature modern technology and machinery that will further improve its food consistency, labour efficiencies and space productivity. The integrated factory is expected to increase capacity by 60%, from 50,000 puffs per day to 80,000 puffs a day. The additional production space, which almost doubled, would also provide additional capacity for its product innovations.”

 

Fundamentals

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  • Total cash is more than Total debt, which is great. (Net cash approx. S$6.58 M).
  • However, the current ratio at 1.35 is low. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses), while total debt/equity ratio is high at 24.1.

Not perfect, but it is not very weak.

 

Valuation

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The Trailing P/E, Price to Book and EV/EBITDA all seem to suggest that the stock price is on the high side (over-priced).(As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).

 

The current stock price of Old Chang Kee is S$ 0.845 (on 24 March 17).

Trailing PEG and Intrinsic Value

Let’s do a quick study on the current share price of S$ 0.845 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

P/E: 20.61

Dividend Yield (%): 3.55 (from POEMS)

5 years EPS compound growth rate: 0 (from FT.com)

The trailing PEG will be 20.61/(3.55+0) = 5.81. Which is not good (above 1).

2) Intrinsic Value

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Hence the intrinsic value of Old Chang Kee is $ 0.46.

Given the current stock price of Old Chang Kee on 24 March 2017 is at SGD 0.845, there is NO margin of safety base on the estimated intrinsic value.

 

 

In Summary

In gist, shall keep a look out for this stock and hope to pick up some when its stock prices are favorable.

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room flat.
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