Investment Highlights

• We maintain our BUY call on Guan Chong (GCB) with a slightly lower fair value (FV) of RM4.05/share (vs. RM4.10/share previously). Our valuation is based on an unchanged PE of 15x FY22F EPS.

• We trim our earnings forecast by 1% for both FY21 and FY22 to account for a slower-than expected-recovery.

• The group is anticipating a difficult 1H21 and we expect a depressed EBITDA yield for that period largely due to a weaker-than-anticipated combined ratio, narrowing bean differential and lacklustre demand as result of the Covid19 pandemic. We are also expecting a lower sales tonnage as result of the low percentage of secured orders for FY21.

• Nevertheless, we still like the group for its large growth potential from expansionary business policies and solid contributions from the Schokinag facility. The group is looking to a better 2H21 as the global economy begins to fully recover from the pandemic and the cocoa butter ratio is anticipated to improve.

• Here are the highlights of GCB’s 3Q20 results briefing:

1. Sales tonnage fell by 17.5% YoY to 59,000 MT due to weaker demand for cocoa butter and container shortage issue causing delivery delays.

2. EBITDA yield has fallen by 23.2% YoY to RM1,094/MT, caused by: (1) a weaker cocoa butter ratio; (2) a global preference shift toward non-Living Income Differential (LID) affected beans, narrowing the bean differential and driving down chocolate manufacturer demand; and (3) a strengthening MYR against the EUR and USD.

3. The cocoa butter ratio weakness is expected to last until 2H21, when demand picks up again. Until then, uncertain demand and fierce competition will pressure margins.

4. The group’s Schokinag facility contributed to 26% of the group’s 3Q20 revenue. Excluding its contribution, revenue is lower by 16% YoY. The facility is anticipated to continue delivering steady profits.

5. The LID has resulted in grinders looking for beans elsewhere, driving up non-LID affected bean prices and narrowing the bean differential. The group currently sources beans from Ecuador and Nigeria. GCB also has been stockpiling beans in anticipation of this development, with inventory levels at record highs.

We believe that the group will experience a difficult FY2021 caused by a lowered combined ratio, narrowing bean differential and uncertain demand. There is still too much uncertainty concerning the circumstances surrounding the LID to forecast a strong recovery until at least 2H21, when the cocoa butter ratio improves amid a global Covid-19 recovery.

On a longer term, we still like the group for its large growth potential from expansionary business policies, strong contributions from the SHG facility and stable earnings trajectory supported by an experienced management.

Source: AmInvest Research - 25 Nov 2020