Investment Highlights

• We maintain BUY on Guan Chong with a higher fair value of RM4.36/share (vs. RM3.43/share previously). Our valuation is based on a PE of 15x FY22F EPS (rolling over from FY21F).
• Guan Chong’s 1HFY20 core net profit of RM87.2mil (-21.4% YoY) made up around 43% of our full-year earnings forecast. We have excluded the gain on the disposal of Fuji Oil Global Chocolate (FGC), an associate company, amounting RM27.8mil. We have also excluded RM14.1mil unrealised gains on foreign exchange. 
• We deem the results to be within expectations as we expect better performance in 2HFY20 as the Covid-19 situation improves and seasonally higher orders in 4Q.
• Guan Chong’s 1HFY20 revenue grew 29.9% YoY to RM1,820.2mil due to the contribution from newly acquired Schokinag Holding GMBH (SHG). The increase was also attributed to higher selling price of cocoa products. However, it was slightly offset by lower sales volume.
• 1HFY20 core EBITDA dropped 1.1% to RM164.8mil after excluding the gain from disposal of FGC. EBITDA margin shrank 2.8 ppts to 9.1%. We believe this was largely due to higher cocoa bean costs.
• Moving forward, the group expects a challenging business environment due to the impact of Living Income Differential’s (LID) implementation and the Covid-19 outbreak.
• The group also expects Covid-19-related lockdowns to cause some delay in shipment to customers and a lower utilisation of grinding capacity in the near future. In spite of this, the group is seeing a gradual uptrend in demand for cocoa ingredients as economies reopen and consumer sentiment returns.
• Guan Chong remains confident of the long-term prospect and uptrend in future chocolate demand. We expect the group’s earnings to fully recover in 2HFY21, postcontainment of the Covid-19 pandemic, growing by 13% in FY21F and 27% in FY22F.
• 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.

Source: AmInvest Research - 25 Aug 2020