Old Chang Kee (SGX:5ML) DCF Analysis

INTRODUCTION:

OCK is one of the most popular fast-food chains in Singapore that began its business in Singapore. Most well known for their extraordinary Curry Puff, this is a well-loved homegrown brand. However, between the very niche Singaporean-centric menu and the low margins items OCK has much more problems to face in its path forward.

REVENUE: My rationale when forecasting revenue came from, “Singaporeans have been eating more and more…it boils down to people being spoilt for choice and opting for convenience over health…people are more likely to grab dessert or a snack between meals, just because they can.”(SOURCE) “98 percent of Singaporeans were found to snack, with 1-in-2 being frequent snackers”(SOURCE)

I opted to only account for Singapore’s outlets when forecasting. The revenue from OCK Singapore accounted for 99.5% of OCK’s entire revenue.
When forecasting the Number of Outlets, from the 2023 Annual Report “However, with the re-opening of the economies...rental costs remain elevated”. I assume that OCK will halt any store openings for at least 1 more year while the macro environment improves. OCK earns very little per outlet and incurred significant costs from these outlet closures in the past few years. I assume that the pace of outlet opening is significantly slower, before recovering at a moderate pace for the rest of my forecast.

When forecasting revenue/outlet, I took into account “Singaporeans top choice for their dine outs…quick serve restaurants (76%)” (SOURCE). As a proxy, the signature “Curry-O” sold by OCK cost about $1.20 in 2013 and now $1.90 in 2023 a Y/Y CAGR of about 4.70%. The recent double-digit Y/Y revenue/outlet is driven by both an easing of the effects of COVID-19 and a closure of stores.
I believe that OCK is a cheap product with the target demographic being cost-conscious consumers, given the poor macro environment currently, more consumers are likely to choose OCK and elevated growth is likely to continue for a short period. However, the double-digit Y/Y growth will taper downwards as OCK has little pricing power to increase prices, and as the macro environment improves consumers will shift their tastes and preferences away from OCK.

COST:
When forecasting COGS, as OCK has an established supply chain with set terms with suppliers and is unlikely to enjoy significant economies of scale given its slow rate of expansion so opting for less granularity I assumed that COGS remained consistent with historical averages throughout my forecast.

When forecasting Administrative and Sales and Distribution, “Singapore’s extremely low unemployment rate and foreign manpower policies have also exacerbated the current manpower shortage in the retail sector”. So I assumed that Administrative and Sales and Distribution would remain elevated for 2 years before tapering back down.

When forecasting Others, Opting for less granularity I took it as an average of historic trends.

WACC:
Cost of Equity
The Singapore government has an AAA rating.

RFR (1M Avg) = 3.42%
Beta (Source) = 0.38

4050 = (4050 * 4.25%) * (1+16%) / (1+R) + [((4050 * 4.25%) * (1+16%)) * (1+3.82%) / (R - 3.82%)] / (1 + R) ^ 2
R = 10.3%, ERP = 6.24%

US ERP = 6.24%

AA Risk Spread = 0.67 

SG ERP = 5.57%

COE = 5.54%

Cost of Debt

As OCK has no bond rating, I used a synthetic rating.

OCK 2023 interest coverage ratio = 8.8x, AAA rating

Corporate Marginal Tax Rate = 17%

COD = 4.11%

AT-COD = 3.41%

Weightage

Stock price (5D Avg) = $0.61

Shares O/S = 121.37M

Market Value of Equity = 74.00M

As OCK does not break down its debt duration, I opted to use BV Liability instead.

Book Value of Liability = 25.35M
%Liability = 25.5%

%Equity = 74.5%

WACC = 5.00% 

CAPEX and D&A:
D&A When forecasting D&A, opting for less granularity I followed historical averages.

CapEX When calculating CapEX, I took into account repayment of the operating lease as I believe that repaying lease payments is also in essence buying a new PP&E. I assumed that OCK continued its depressed CapEX expenditure for another year before slowly expanding. When forecasting CapEX, I took a look at historical averages as a gauge for what OCK’s ROIC could potentially be. Conclusion: Ultimately, I value OCK at $0.94 per share. I believe that currently, the elevated growth is due to the poor macro environment boosting OCK's sales. However, OCK is still underpriced as investors are overly pessimistic about how long it will take OCK to recover. I believe that OCK is well-primed to bounce back from this. However, their overseas growth story is harder to buy and may be dragging down their full potential. Base Case: (SOURCE) Best Case: (SOURCE) Worse Case: (SOURCE) Revenue Model: (SOURCE) Cost Model: (SOURCE) Change in NWC schedule: (SOURCE)