Investment Highlights

• We maintain BUY on Guan Chong (GCB) with a lower fair value of RM3.79/share. Our valuation is based on an unchanged PE of 15x FY22F EPS. There are no changes to our FY22F net profit forecast for GCB.

• We are optimistic on GCB’s recovery prospects from 2HFY21 onwards. However in the immediate term, we anticipate a weak 1HFY21. Due to chocolates being an item that benefits from impulse buying, gifting and dining out, travel restrictions weigh heavily on its prospects. Airline duty-free stores, a prominent distribution channel, are likely to be worst affected by the Covid-19-inflicted crisis.

• We raise FY21F’s earnings forecast by 11%, based on our expectations for a strong recovery in 2HFY21. Reasons: (1) European vaccination programmes are proceeding at an encouraging rate; (2) cocoa prices driven down by a production surplus; (3) the USD/MYR ratio is stabilizing.

• On a longer scale, we remain optimistic on the group’s growth potential from its overseas facilities of Schokinag in Ivory Coast and the UK. The Ivory Coast facility is scheduled for completion by 4QFY21.

• Additionally, Asian markets see enormous long-term potential. Rising affluence and changing lifestyles bode well for cocoa grinders.

• In the long term, we believe that the living income differential (LID) issue would have an impact on cocoa supply. It seems likely that buyers and sellers will eventually come to a compromise that may affect cocoa prices negatively or risk facing a systemic issue that will permanently damage the global chocolate supply. We are also concerned that this may affect the efficacy of the Ivory Coast plant.

• GCB’s FY20 core net profit of RM212.4mil came within expectations. It came up to 96% and 99% of our and consensus full-year estimates. GCB’s FY20 revenue rose by 25% YoY to RM3.69bil attributed to strong contributions by the Schokinag facility.

• Despite the sharp increase in revenue, PBT only rose by 1.7% YoY to RM223mil in FY20, with PBT margins falling by 1.8 ppts to 7.3%. This is likely a result of lower cocoa butter ratios.

Source: AmInvest Research - 1 Mar 2021