Investment Highlights

• We maintain our BUY call on Guan Chong with a slightly lower FV of RM3.20/share (RM3.22/share previously). Our valuation is based on a PE of 13x FY21F EPS.

• 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.

• Guan Chong’s 1QFY20 core net profit of RM82.4mil (+30.6% YoY) made up 35% of our full-year earnings forecast. The core net profit includes the RM27.8mil gain on the disposal of Fuji Oil Global Chocolate (FGC), an associate company. We have accounted for this gain in our forecasts as mentioned in our report on 3 March 2020. Hence, we deem the results as within expectations.

• However, we trim our earnings forecasts by 2.4% for FY20F and 8.3% for FY21F to account for the delay in its Ivory Coast expansion plan as well as the negative impact from global lockdowns due to Covid-19 pandemic. We assume EBITDA yields of roughly RM1,290 for FY20F and RM1,380 for FY21F–FY22F.

• Guan Chong’s 1QFY20 revenue was RM909.4mil (+40% YoY; 14.2% QoQ) due to the contribution from newly acquired Schokinag Holding GMBH (SHG). Excluding the contribution from Schokinag of roughly RM196.9mil, the group’s revenue expanded 10% YoY. The increase was attributed to higher selling price of cocoa products.

• 1QFY20 EBITDA grew 39% YoY (+29.1% QoQ) to RM82.4mil due to the gain from the disposal of FGC. However, EBITDA margin fell 1.1ppt to 10.0%. We believe this was largely due to higher bean cost (up 14–18% YoY; up 0–4% QoQ) to £1,913 and US$2,644 per MT in 1QFY20.

• Moving forward, the group expects a challenging business environment due to impact of Living Income Differential (LID) implementation and Covid-19 outbreak. Lockdowns implemented worldwide has resulted in a slowdown of economy and shrunk the demand of chocolate consumption.

• The group also expects the lockdowns to cause some delay in shipment to customers and lower utilisation of grinding capacity in the near future. The upcoming new grinding facility in Ivory Coast is now slated to begin commissioning in 2H2021 (delayed from 1Q2021).

• However, Guan Chong remains confident of the long-term prospect and uptrend in future chocolate demand. We expect the group’s earnings to recover in 2HFY21F, postcontainment of the Covid-19 pandemic, growing by 7% in FY21F and 26% in FY22F.

Source: AmInvest Research - 1 Jun 2020