Investment Highlights

• We maintain our BUY call on Guan Chong with a higher FV of RM3.51/share, pegged to a P/E of 13x FY21F EPS which is at a discount to international peer’s average forward P/E of 19x. We raise our full-year earnings forecasts for FY19F, FY20F and FY21F by 8.9%, 5.8% and 0.4% respectively. This is to account for a higher EBITDA per tonne estimate.

• We expect Guan Chong’s FY19 results, due to be announced by the final week of February, at RM230mil– RM240mil at the net profit level (an earnings increase of 21%–27% YoY).

• We believe that Guan Chong’s earnings in 4QFY19 will continue to be strong as the USD/MYR remains steady QoQ. Due to its hedging practices (as shown in Exhibit 1), we anticipate its EBITDA per tonne to be largely unaffected by the 8.7% QoQ increase in cocoa bean prices. We estimate an EBITDA of around RM1,390/tonne in FY19E vs. RM1,300/tonne in FY18.

• Going forward, Guan Chong would be setting up its new plant in Ivory Coast, which is expected to increase its production capacity by another 60K MT. Construction of the circa €55mil plant is estimated to take over 1.5 years and is expected to be operational by 1Q2021.

• The new plant is expected to maximize the yield potential of cocoa beans, reduce transportation costs and expand the group’s market presence and competitive advantage in the European market through the tariff-free deal between Ivory Coast and European market.

• On another note, we maintain our view that the proposed acquisition of Schokinag Holding GMBH (SHG) to be positive on the group’s long-term prospects.

• Recall that the key reasons behind the proposed acquisition are to: 1) strengthen the group’s position in Europe, which is the biggest consumer market for chocolate; 2) complement its upcoming plant in Ivory Coast; and 3) attain the expertise of SHG’s operations such as understanding the taste profile of the European consumer market.

• We have not accounted for SHG’s contribution in Guan Chong’s P&L pending further information from management. However, we think that the acquisition of SHG would enhance earnings.

• We like Guan Chong for: 1) its growth potential from expansion plans; 2) its position as the 4th largest cocoa bean grinder; and 3) its stable earnings trajectory supported by an experienced management.

Source: AmInvest Research - 18 Feb 2020