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What’s Next For Old Chang Kee After Record Performance?
Mention curry puff and many would associate the tea-time snack with Old Chang Kee (OCK). After all, the selling of its signature pastry was how it all began for the homegrown brand.
History
The company started out as a small curry puff vendor along Mackenzie road back in 1956. But it wasn’t until 1986 that things got stepped up when chariman Han Keen Juan bought over the establishment.
The pivotal move stemmed from Han’s sight of re-inventing OCK’s business to become Singapore’s leading brand of curry puffs and other hot savories.
With that in mind, many other local delights such as seafood snacks were added to OCK’s food offering.
The menu was not the only thing that was enlarged. Along the company’s expansionary path came the introduction of theme eateries such as Curry Times, Mushroom Cafe and Take 5 which had allowed OCK to capture the dine-in crowd.
Such was the successful transformation of OCK which took the form of a vast network of more than 80 strategically located outlets across Singapore.
Performance
Looking at OCK’s share price, the rally in past months was likely an indication of shareholders’ satisfaction with the company’s financial performance, which was on the same page with its operational performance.
The latest fiscal year ended 31 March 2014 saw both top and bottom lines reach the peak. Besides the contributing factor of new outlets, margins played a big part. Gross margin stood at 62.2 percent. Over the most recent five years, the profitability indicator averaged 60 percent.
As for net margin, the average was about 7 percent, which is considered quite decent for a snack seller. OCK came in within the top five in comparison with other locally-listed F&B players.
Source: Annual reports; One-time gains are excluded from calculation
Provided that consumer’s preferences do not change and there is room for selling price reversion, these profitability levels should not see major fluctuations going forward. Why? Firstly, OCK’s established brand name would translate to lesser marketing costs. Next, expenses and capital expenditure are kept to the minimal as most of OCK’s sales are on a takeaway basis.
OCK has also been keeping its balance sheet in check. Debt ratio stood at 8.2 percent end-March. This is in part due to sufficient cash flow generated from its operation to fund its expansion.
Coupled with a cash ratio of 2 times, OCK seems to be in great shape.
Things are going well for OCK, right? Well, not exactly.
As seen from the chart below, sales growth has been declining. This means that what is largely fuelling net profit growth is reduced expenses coming from cost control measures and increased productivity.
While such scalability is commendable, the road ahead does look bumpier in light of the increasingly competitive snack scene in Singapore.
Source: Annual Reports
Investment Merits
• Established household name with resilient business
• High gross margin of about 60 percent for the past five years
• Decent profitability ratios with return on asset and return on equity averaging 13 percent and 18 percent respectively over a 5-year span
• Ample liquidity with a cash ratio of 2 as at end-March; the cash pile OCK has is enough to clear its current liabilities off its balance sheet twice
• Cash-generative nature of business; cash flow from operating activities has consistently eclipsed net profit
Investment Risks
• Growth potential is called into question
• Intense competition in snack arena
• Labour intensive nature of business
• Change in consumer preferences; more becoming health-conscious
• Bad publicity affecting reputation
SI’s Takeaway
Given the strong profitability indicators and the resiliency of OCK’s business, the company is definitely comfortable with where it stands.
Thus, what investors need to be concerned about now is forward looking.
To put it in another way, the question of what growth plans the company have in the pipeline would need to be addressed at this point of time so as to shed some light on the company’s growth potential.
That said, OCK’s reasonably sizeable cash hoard would serve the company well when opportunities present themselves.
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