Investment Highlights

We maintain our BUY call on Guan Chong with a slightly higher FV of RM3.53/share (RM3.51 previously), 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 have raised our FY20F, FY21F and FY22F earnings forecasts by 6%, 1% and 1% respectively. This is to reflect the gain on disposal of FGC, lower EBITDA yield of its cocoa products and consolidation of Schokinag business.

Guan Chong announced on Bursa that: 1) the group is disposing its entire 27.75% equity interest in Fuji Global Chocolate (FGC); and 2) it has completed the acquisition of Schokinag Holding GMBH (SHG) on 30 January 2020. We also met with Guan Chong yesterday. The key takeaways are as follows:

• Fuji Oil Global Chocolate (FGC) was an associate company of GCB’s which focuses on manufacturing, marketing and promotion of cocoa related products. The group divested 70% of the company in 2016 to Fuji Oil Asia (FOA), allowing GCB to concentrate on cocoa processing while FOA focuses on improving the industrial chocolate business. GCB’s cost of investment in FGC over 10 years was around RM6.7mil.
• The disposal consideration amounts to RM32mil and the proceeds are expected to be utilized for working capital and repayment of trade loan purpose within 6 months. The group is expecting a gain on disposal of associate of circa RM25mil. We have made changes to our earnings forecast to reflect this. The disposal is expected to be completed in 1QFY20.

• Schokinag acquisition was completed on 30 January 2020. Recall that the €29.9mil (circa RM137.8mil) acquisition is expected to bring synergistic value to Guan Chong. We expect the acquisition to be earnings accretive and have made revisions to our earnings forecasts.

• Living Income Differential (LID) still up in the air. There is still uncertainty on how the LID will be implemented and the extent of its impact to the group. As a result, chocolate manufacturers are delaying orders and adopting a wait-and-see stance while the LID implementing gets ironed out. Hence, the group is expecting a more volatile 2HFY20 as orders have not been fully filled in for that period

So far, the group has not seen much impact from the Covid-19 outbreak aside from its business in China, which is minimal for Guan Chong. However, the outbreak remains an ongoing concern as there is no certainty on how it will play out. A prolonged outbreak could hinder global economic growth.

We have lowered our EBITDA yield expectation for its cocoa products amidst the LID uncertainty, global economic uncertainty and Covid-19 outbreak.

Ivory Coast plant is progressing on schedule.

Source: AmInvest Research - 3 Mar 2020