Investment Highlights

• We maintain our BUY call on Guan Chong with an unchanged FV of RM3.49/share, pegged to a P/E of 13x FY21F PE which is at a discount to international peer’s average forward P/E of 19x.

• We like Guan Chong for its: 1) growth potential from expansion plan, 2) its position as the 4th largest cocoa bean grinder, and 3) stable earnings trajectory on the back of experienced management.

• Guan Chong announced that through GCB Cocoa Singapore Pte Ltd (GCBCS), it has entered into a sale and purchase agreement with Schokinag Holding B.V. to acquire the entire registered share capital of Schokinag Holding GMBH (SHG) for a total purchase consideration of €29.9mil (circa RM137.8mil). The proposed acquisition is expected to be completed in 1Q2020.

• In addition, GCBCS will pay €2.3mil to SHG’s free capital reserve for capital funding purposes. The group will also assume a shareholder loan of €1.0mil.

• The purchase price for the acquisition will be funded via internally generated funds, part of which will be reimbursed via banking facilities.

• We do not know if the proposed acquisition is earningsenhancing or if the purchase price is fair. There were no details on the profitability of SHG. Assuming a return on investment of 5%, we estimate that SHG would improve Guan Chong’s FY20F net profit by 3.2%.

• SHG is engaged in the business of manufacture, sale and distribution of industrial chocolates like chocolate chips, chocolate chunks and liquid chocolates for the F&B industry. SHG has an annual bean grinding capacity of 7K MT, to grind cocoa beans into cocoa liquor and cocoa mass and industrial chocolate manufacturing capacity of 90K MT per annum.

• This proposed acquisition will expand the group’s product range into the downstream industrial chocolate B2B market. Currently, Guan Chong’s downstream operations is via Carlyle Cocoa which has a 7K MT cocoa cake grinding facilities and up to 40KMT butter melting facilities.

• The rationale behind the acquisition is that it is a part of the group’s global expansion strategy, to expand its presence to Europe. The acquisition in expected to place Guan Chong in position to target new growth opportunities in the world’s largest chocolate consuming market.

• The group expects that SHG will require circa 40-50% of the supply of cocoa ingredients from its upcoming plant in Ivory Coast. This is to ensure that its oncoming new capacity will be immediately met with demand.

• Recall that Guan Chong announced that it will spend €55mil to construct a new bean grinding plant in Ivory Coast. The construction is estimated to take over 1.5 years and is expected to be commissioned and operational by 1Q2021.

• We are positive on this news for the group’s long term prospects. However, we have not made any changes to earnings forecasts as we believe any direct positive contribution from the acquisition will be offset by higher financing cost. Assuming 30% of the proposed acquisition is funded with borrowings, we estimate its finance cost to increase by circa RM1.8mil.

Source: AmInvest Research - 20 Dec 2019