Investment Highlights

• We maintain our BUY call on Guan Chong (GCB) with a lower fair value (FV) of RM4.10/share (vs. RM4.36/share previously). Our valuation is based on an unchanged PE of 15x FY22F EPS.
• We remain positive on GCB’s outlook due to: (1) its high growth potential from its expansionary business policies; (2) strong contribution from the SHG facility; and (3) an increasingly positive global outlook on the back of a recovery from Covid-19 in FY21F.
• We consider GCB’s 9MFY20 core net profit of RM134.5mil (-23.7% YoY) to be within expectations as the bulk of the orders are expected to come in during 4Q. We have excluded the gain on disposal of Fuji Oil Global Chocolate worth RM27.8mil and unrealised forex gain of RM13.6mil.
• We have reduced our earnings forecast by 3% and 6% for FY21F and FY22F respectively to factor in additional operational costs from GCB’s new facility in the UK.
• The UK plant is expected to be functional in 2HFY22. While we believe that the facility will provide a notable boost to the group’s European operations, it may only be reflected in its earnings in the following year.
• GCB’s 9MFY20 revenue grew by 24.0% YoY to RM2.7bil, attributed to higher ASP of cocoa ingredients from an improved combined ratio and contribution from Schokinag Holding GmbH (SHG).
• The impact of the higher ASP in 9MFY20 was slightly offset by weaker sales volume. We believe that sales volume may have declined in 9MFY29 as Covid-19 affected the demand for chocolates and other cocoa products.
• In terms of margin, we estimate GCB’s EBITDA yield to be relatively flat at RM1,382/tonne in 9MFY20 vs. RM1,385/tonne in 9MFY19.
• Going forward, GCB anticipates challenging business conditions with the dual impact of the Living Income Differential (LID) implementation in Ghana and Ivory Coast affecting orders and the lingering effects of the Covid-19 outbreak pushing down sales.
• Nevertheless, the group believes that the rest of FY20E will be sustained by pent-up demand, as well as business restocking for end-year festivals.

Source: AmInvest Research - 24 Nov 2020