Investment Highlights

• We maintain our BUY call on Guan Chong with an unchanged fair value of RM4.36/share. Our valuation is based on a PE of 15x FY22F EPS.

• Highlights from Guan Chong’s 2QFY20 briefing:
  
  1. 2QFY20 sales tonnage improved 4% QoQ (-13% YoY), led by higher cocoa butter sales tonnage which increased 13% QoQ (-5% YoY) as well as cocoa liquor which edged up 2% QoQ (-29% YoY). This was on the back of a lower base in 1QFY20 where sales of cocoa butter were deferred to 2QFY20. On the other hand, cocoa solids (cocoa powder and cocoa cake) sales volume dropped 3% QoQ (-17% YoY).
  
  2. Utilisation rate was high at 98% in 2QFY20 (96% in 1QFY20). Although utilisation rate was high, sales volume remained lower YoY as the group kept the products in stock for future sales while running the plant at its optimal level. As sales normalise, we expect improved sales tonnage in subsequent quarters.
  
  3. EBITDA yield has begun to normalise, growing 15% QoQ (-3% YoY) to RM1,394/MT (RM1,434/MT in 2QFY19). Average selling prices (ASP) for the group’s products were higher YoY despite lower sales volume. This was due to better combined ratio. However, we think ASP might face a slight downward pressure if cocoa bean prices continue to decline (as they have since end-June 2020).
  
  4. Living Income Differential (LID) in Ivory Coast and Ghana has affected orders. Major chocolate manufacturers are not committing to purchases in FY21F due to the uncertainty of the implementation of LID.
  
  5. Hence, we expect a slightly volatile FY21F as orders have not been filled in as usual (around 25%–30% orders secured instead of the usual 50%). The group has secured roughly 60% of sales for 1Q2021.
  
  6. Guan Chong remains confident of its long-term prospects 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.
   
• Excluding Schokinag Holding GMBH’s (Schokinag) revenue contribution of roughly RM351mil in 1HFY20, revenue grew 5% YoY. Schokinag’s EBITDA contribution of RM6mil in 1HFY20F also helped mitigate the drop in EBITDA from 5% YoY to 1% YoY (after excluding the RM28mil one-off gain from sale of associate). Utilisation rate for Schokinag has improved to above 80% now.
   
• 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. The group’s Ivory Coast expansion plans remain on target. The group expects the first line to be commissioned by 2H2021.

Source: AmInvest Research - 1 Sept 2020