Investment Highlights

• We maintain our BUY call on Guan Chong with a higher FV of RM3.43/share (RM3.20 previously). We increase our PE multiple from 13x to 15x, which is at a discount to its international peers. This is to reflect the higher PE for its international peers of 21x (19x previously) as well as the synergistic value that Schokinag Holdings GMBH, which was recently acquired in 1Q2020, brings to the group.

• However, we are trimming our earnings forecasts to account for the adverse impact from the Covid-19 pandemic and the implementation of Living Income Differential on Ivory Coast and Ghana cocoa beans.

• We lower earnings forecasts by 7% for FY21F and 6% for FY22F. We also reduce our FY21F EBITDA yield assumption (after taking out contribution from Schokinag) to RM1,240–RM1,250 per MT from RM1,290/tonne.

• We continue to 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.

• Highlights from Guan Chong’s 1QFY20 briefing; 1. Sales tonnage dropped 0.7% YoY (-15.8% QoQ). Sales tonnage of cocoa solids grew 1.0% YoY (-12.1% QoQ) while that of cocoa butter dropped 2.2% YoY (-18.7% QoQ). 2. The drop was largely attributed to logistic issues during the movement control order (MCO). Despite a strong utilisation rate of 96%, the inability to deliver the products dampened the group’s revenue growth. Around 5–10% of sales volume were delayed. 3. The Covid-19 pandemic has impacted the demand for premium chocolate, which typically uses more cocoa butter ingredient. This was partly attributed to the severity of the outbreak in key markets (Europe, the US) as well as the disruption to the tourism industry, which makes up a part of high-end chocolate consumption. On the other hand, consumption of normal chocolate remained resilient. 4. Combined ratio jumped in 1Q20, driven by higher selling price of cocoa powder. The resilient demand for normal chocolate, which uses more cocoa powder, has buoyed selling prices for the ingredient. 5. EBITDA yield was lower by 6.6% YoY (-2.6% QoQ) to RM1,210.30/tonne. The drop was partly attributed to the delay in delivery which lowered revenue for 1QFY20. The logistic issues have since been ironed out and the group does not expect a repeat of the issues.

Source: AmInvest Research - 2 Jun 2020