Investment Highlights

• We maintain our BUY for Guan Chong (GCB) with a lower fair value of RM3.12/share (vs. RM3.48/share previously), using an unchanged PER of 15x FY22F EPS. There is no ESG-related price adjustment for our rating of 3 stars.

• GCB’s 1HFY21 core net profit of RM35.7mil was below expectations, coming in at 21% and 18% of our and consensus full-year forecasts respectively. Although we expect a stronger 2HFY21 for GCB, the dual effects of Covid19 reduced demand and uncertainty surrounding the Living Income Differential (LID) situation had a far more severe impact on sales tonnage than expected.

• We reduce our earnings forecasts for FY21E/FY22F/FY23F by 29%/10%/2% as we expect the Delta variant to delay expansion plans and keep cocoa butter and liquor ratios suppressed longer than expected.

• Nevertheless, we remain optimistic on GCB’s long-term outlook as the group’s Ivory Coast, UK and German facilities are expected to come online within the next few years, though a delay in construction is very likely.

• The LID situation, which has been improving over the course of the last few quarters, is a positive catalyst for order growth. Recovery in chocolate demand is still imminent, although the process is likely to be slower than expected.

• The Delta variant is envisaged to slow the global economic recovery and hence, preventing a share price rerating in the quarter. The current situation is obscuring chocolate demand projections and dissuading customers from placing orders. We believe that it will take time for cocoa butter and liquor ratios to return to pre-pandemic values.

• Revenue fell by 9% QoQ and 4% YoY to RM876.2mil in 2QFY21 due to the lacklustre orders. As mentioned previously, uncertainties resulting from LID and Covid-19 prevented customers from placing their usual volume of orders.

• The group’s EBITDA dropped by 26% YoY to RM66.6mil in 2QFY21, while EBITDA margin fell by 2.3ppt as a combination of lower sales tonnage, weaker butter and liquor ratios and high freight costs plagued the group.

• On a QoQ basis, EBITDA rose by 6% in 2QFY21 despite a weaker revenue. EBITDA margin similarly rose by 1.0ppt, due to better contributions by the Schokinag facility and improved ratios.

Source: AmInvest Research - 24 Aug 2021