SINGAPORE (Feb 13): Equity markets continued their run over the past week, with the Straits Times Index hitting yet another 52-week high of 3,076.5 points on Feb 7. The STI gained 0.2% over the period of Feb 1 to 7, and is up 6.7% for the year. Over the same period, our portfolio has gained 1%. It is now up 2.2% for the year.

The run-up in the STI this year mirrors that of the US benchmark Standard & Poor’s 500 index, which is hovering close to its Jan 25 all-time high of 2,298 points. 

Bloomberg data indicates that the S&P’s price-to-earnings valuation is at its highest since December 2009. The S&P closed at 2,292.6 on Feb 6. Strong employment data in the US, an increase in crude oil prices and an expected rollback in financial regulatory rules in the US were among the positive headlines lifting sentiment. Investors also expect US President Donald Trump to fulfil his campaign pledges to slash the corporate tax rate from 35% to as little as 15% and increase public spending.

Several stocks in our portfolio recorded gains this week, with some hitting their 52-week highs. Egg producer Chew’s Group gained 4.2% over the period and is now up 17.5% for the year; its closing price of 36 cents on Feb 7 was a 52-week high.

Meanwhile, shares in CapitaLand rose 1.8% from Feb 1 to 7. The stock has climbed 13.6% this year, and its Feb 7 closing price of S$3.44 was a 52-week high. 

CapitaLand will announce its 4Q and FY2016 results on Feb 15. The property developer is expected to report better earnings in the coming quarters, as it grows its stable of commercial properties, DBS Group Research says in a Nov 25 note. Separately, CIMB Research says it continues to like CapitaLand for the latter’s capital recycling strategy, which is expected to boost the group’s return on equity.

Rounding off our gains last week was Fischer Tech; the maker of plastic components is up 1.3% for the period under review. The counter closed at S$1.60 on Feb 7, a 52-week high.

At the other end of the spectrum, Indonesia-based agri-food producer Japfa led losses this past week. The stock fell 3.3% between Feb 1 and 7, although the counter is still up 13.3% for the year. Logistics firm Cogent Holdings fell 2.6% over the week, but is still up 30.2% this year. Meanwhile, AP Oil International declined 2% and Venture Corp fell 0.4% in the Feb 1 to 7 period.

Old Chang Kee ramping up capacity

Following our Cover Story on F&B retailers (Issue 765, Feb 6, “F&B plays look pricey, but some are showing rebounding earnings”), we are adding Old Chang Kee to the Singapore Market Portfolio. The homegrown snacks chain is best known for its signature curry puffs, first sold from a small stall in a coffee shop on Mackenzie Road. 

The company has parlayed its 61-year-old heritage into an international brand. It has more than 80 outlets in Singapore and nine overseas, spread out across Australia, Indonesia and Malaysia.

As it embarks on its next phase of growth, Old Chang Kee is ramping up manufacturing capacity to meet rising demand for its products. The company recently completed two new facilities: one in Woodlands and another in Iskandar Malaysia. Reconstruction work at the company’s original factory facility in Woodlands will be completed in June and subsequently fully integrated with the adjacent new factory.

With the new facilities poised to come online in the coming months, Old Chang Kee is well positioned to expand its product line, achieve economies of scale and widen its margins. The company’s potential has attracted the attention of Phillip Capital, which initiated coverage of the stock last November.

“The integrated factory is expected to increase capacity by 60%, from 50,000 puffs a day to 80,000 puffs a day,” says Phillip analyst Soh Lin Sin. “The additional production space, which will almost double, will also provide additional capacity for its product innovations.”

For FY2016 ended March, Old Chang Kee reported a 3.1% increase in revenue to S$73.9 million, but earnings declined 5.9% to S$5 million. The group’s gross margin increased to 63.1% from 62.4%, thanks to tighter cost control over raw material costs and an improvement in product mix. However, the bottom line was affected by higher staff costs and higher outlet rental expenses. Depreciation and amortisation also increased because of the renovation of the factory at Woodlands, new equipment for the factory and new enterprise resource planning software.

The company’s most recent set of results shows some improvement, though. For 2QFY17 ended Sept 30, 2016, Old Chang Kee posted a 30.5% jump in earnings to S$1.6 million. 

The company appears to be benefiting from economies of scale. Revenue rose 5.9% to S$20.5 million from a year ago, owing to contributions from new outlets and higher sales volumes at existing ones. Revenue from other services, such as delivery and catering, rose as well, thanks to higher sales generated from its factory in Malaysia.

Phillip’s Soh is bullish about the company’s growth prospects. “We expect earnings to grow [at an] 8.9% compound annual growth rate over the next three years,” writes Soh. Earnings for FY2018 are expected to surge 29% versus FY2016.

Old Chang Kee has declared an interim dividend of 1.5 cents a share for 2QFY17, representing a yield of 3.7%. It paid out total dividends of six cents in FY2016, including a one-off special dividend of three cents. With its strong balance sheet and steady cash flows, the company is in a good position to maintain its generous payouts. It has generated average free cash flows of S$2.5 million a year over the past three years. For the six months to Sept 30, the group generated positive operating cash flow of $4.8 million and free cash flow of S$2.1 million.

Shareholders can also look forward to higher payouts in the years ahead, says Phillip’s Soh. “After the completion of its factory reconstruction project in 1QFY2018, we expect no significant capital expenditure. Thus, we believe the growing free cash flow from FY2018F onwards could lead to a higher dividend payout of four cents in FY2019,” says Soh.

Shares in Old Chang Kee are down 1.8% this year, versus a 6.7% gain in the STI. If the company manages to execute its growth plans, the stock could see a rebound in the months ahead.

Latest portfolio moves

Our portfolio, which started on Jan 5, is now holding 43,400 shares in AP Oil International, purchased at 23 Singaporean cents each; 3,200 shares in CapitaLand, purchased at $3.06 each; 1,000 shares in Venture Corp, purchased at S$10.12 apiece; 30,300 shares in Chew’s Group, purchased at 32.5 cents each; 6,900 shares in Fischer Tech, acquired at S$1.45 each; 14,400 shares in Cogent, at 69.5 cents each; and 9,600 shares in Japfa, purchased at S$1.04 each. This week, we added 12,400 shares in Old Chang Kee at 81 cents apiece. Our cash balance stands at S$120,218.

This article appears in Issue 766 (Feb 13) of The Edge Singapore which is on sale now