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: 1) its growth potential from expansion plans, 2) its position as the 4th largest cocoa bean grinder and 3) stable earnings trajectory on the back of experienced management.

• Recall that recently, Guan Chong proposed to acquire Schokinag Holding GMBH (SHG) for a purchase consideration of €29.9mil or circa RM137.8mil (excluding assumption of shareholder loan and capital funding). The proposed acquisition is expected to be completed in 1Q2020.

• SHG was founded in 1923 and has been manufacturing chocolates for more than 90 years. The company was taken over by ADM in 2009 before its chocolate production arm was sold to Cargill in 2015. In 2016, the company were taken over by 2 Dutch financial investors. SHG’s product line includes chocolate chips, chocolate chunks and liquid chocolates meant for the F&B industry. Its annual bean grinding capacity is about 7K MT (to grind cocoa beans into cocoa liquor and cocoa mass). SHG has an installed capacity of 90K MT per annum to manufacture industrial chocolate.

• The key takeaways from last Friday’s meeting are as follows:

• The key rationale behind the proposed acquisition of SHG are the strategic location and its synergistic potential with Guan Chong. 1. SHG is located in Europe, which is the biggest consumer market for chocolate in the world. This will allow Guan Chong to strengthen its position in a market where consumption of chocolate is very high (according to Statista, consumption of chocolate in Germany is circa 7.9kg per capita). Guan Chong will also acquire SHG’s vast network of customers. 2. The acquisition is expected to complement its upcoming plant in Ivory Coast which is slated to be complete in 1Q2021. SHG is expected to consume up to 50% of Ivory Coast’s 60K MT capacity. This ensures an immediate demand for its Ivory Coast plant. 3. We believe it will be a win-win situation for SHG and Guan Chong as SHG may achieve savings with cheaper raw material cost while Guan Chong will be able to lock a better ratio for its food ingredients. Guan Chong will also benefit from attaining the expertise of SHG’s operations such as understanding the taste profile of the European consumer market.

Source: AmInvest Research - 23 Dec 2019