Investment Highlights

• We maintain our BUY call on Guan Chong with an unchanged 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 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.

• We cut our FY20F earnings forecast by 3% as we expect volatile market conditions and cocoa bean prices in the near term due to the Covid-19 outbreak as well as the living income differential (LID) situation.

• However, our FY21F earnings forecast remain relatively unchanged as the roll-out of the new capacity in Ivory Coast is expected to improve earnings. We introduce our FY22F earnings forecast of RM305.1mil.

• Guan Chong’s FY19 core net profit of RM209.4mil (+17% YoY) was below expectations, accounting for 90.7% our full-year earnings forecasts. This was attributed to higher taxes as the group recognized a deferred tax of RM16.1mil. The deferred tax was in respect of the Koko Budi plant expansion investment.

• Guan Chong’s FY19 revenue was RM2,942.1mil, up 29% YoY. This was largely due to a 20% increase in the sales volume of cocoa products. Guan Chong’s production volume grew 22% YoY to 245.7K MT in FY19.

• FY19 EBITDA grew 27% to RM332.8mil while EBITDA margin was flattish at around 11%. EBITDA yield was RM1,352 per MT in FY19 compared to circa RM1,301 per MT in FY18.

• Comparing 4QFY19 against 3QFY19, revenue grew 7% to RM796.4mil while EBITDA dropped 10% QoQ to RM78.3mil. EBITDA margins shrank 1.8ppt to 9.8% in 4QFY19. EBITDA yield dropped to RM1,253 per MT from RM1,434 per MT in 3QFY19. This was largely due to higher bean cost (up 8.7% QoQ to US$2,540 per MT in 4QFY19) which the group was unable to fully pass on to customers in time. The MYR remained steady against the USD at an average of RM4.16 in 4QFY19.

• Moving forward, the group expects a challenging FY20F amidst current the high market terminal price and the uncertain impact of the LID implementation.

• Moreover, the Covid-19 outbreak is expected to have an impact on the Asian and world economy. However, Guan Chong anticipates the impact to be mitigated by the stable demand growth for chocolate.

• Looking into FY21F, Guan Chong’s new plant in Ivory Coast would be operational in 1Q. The new plant would increase the group’s production capacity by another 60K MT. Construction of the circa €55mil plant is currently ongoing.

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

• On another note, we believe that the proposed acquisition of Schokinag Holding GMBH (SHG) is positive for Guan Chong.

• 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.

Source: AmInvest Research - 25 Feb 2020