Investment Highlights

• We maintain our BUY call on Guan Chong (GCB) with a reduced fair value (FV) of RM3.48/share (vs. RM3.79/share previously). We have reduced our FY22F EPS for GCB for housekeeping reasons.

• Our valuation is based on an unchanged PE of 15x FY22F fully diluted EPS. We provide a 3-star ESG rating as appraised by us (Exhibit 3), with no adjustment to our FV.

• We remain positive on GCB’s growth potential due to its strong expansionary business policy, reliable contribution from its Schokinag (SHC) facility and an increasingly positive global outlook on the back of recovery from Covid-19. The group’s Ivory Coast and UK facilities are significant growth drivers and their operations are progressing smoothly.

• Some briefing highlights:

1. Capex for FY21F to FY23F. So far there are only two major projects in the pipeline i.e. (1) the Ivory Coast facility, with an estimated capex of €50mil to €60mil; and (2) the UK factory acquisition, with an expected capex of €38mil. The remaining capex will be allocated for maintenance of plants and equipment.
    
2. Timeline. The Ivory Coast factory is targeted for completion in 4QFY21 and commissioning in early FY22F. The UK factory’s liquid industrial chocolate line is targeted for commissioning in 1QFY22. The plant’s value-added capacity line will begin operations in 2QFY22.
    
3. Average FY20 EBITDA yield (excluding SHC contributions) fell by 8% YoY to RM1,243/MT due to lower combined ratios. This is expected to improve in FY21F as global demand recovers and prices of cocoa beans ease due to a supply glut.
    
4. In FY20, the SHC facility contributed RM789mil in revenue and RM15.7mil in EBITDA (21% and 5% of group revenue and EBITDA respectively).
    
5. In FY20, the SHC facility was a downstream buffer for low cocoa butter demand, though it was affected by high import duties from Malaysia. A silver lining is that the future Ivory Coast facility will enjoy lower import duties compared with Malaysia.
    
6. SCH made an EBITDA loss of RM2.6mil in 4QFY20 as result of mark-to-market purchasing of commodities. GCB believes that the unrealised losses would be reversed when the contracts are closed in the next few quarters.
    
7. More than 80% of GCB’s cocoa butter and solids production capacity has been locked in for FY21F. The group is optimistic that the cocoa solids contribution would be higher as the year progresses.
    
8. Ivory Coast is offering a steep discount for its cocoa beans, given a severe lack of demand. Originally selling with a premium of £100/MT over its ordinary selling price, this has since declined to a discount of £150–200/MT. GCB predicts a further drop in this differential in FY22F as demand is not strong enough to sustain the current price.

Source: AmInvest Research - 4 Mar 2021