Investment Highlights

• We reiterate BUY on Guan Chong with a revised fair value of RM3.40 (from RM3.12), based on unchanged PER of 15x 2022F EPS. We raise 2021F–23F earnings by 16%, 3% and 1% respectively for housekeeping purposes. There is no ESG-related price adjustment for our 3-star rating.

• We like Guan Chong for its overseas expansion plan prospect, giving the company an opportunity to tap into the European market, which has the biggest chocolate consumption. The stock is trading at an undemanding valuation of 12.3x PER 2022F EPS compared to the Bursa Malaysia Consumer Product Index’s historical average of 19x PER. The company’s 2022F strong earnings growth will be underpinned by: i) normalization of EBITDA yield; ii) recovering demand for cocoa butter; and iii) maiden earnings contribution from the Ivory Coast plant.

• LID confusion subsiding, EBITDA yield to improve. We expect Guan Chong’s EBITDA yield to gradually improve now that the industry has better clarity over the impact of the living income differential (LID) to cocoa bean price. Dipping below RM1,100/MT level, the company’s 2021 EBITDA yield was negatively affected by the lack of clarity of the LID impact as Guan Chong had locked its sales at an unfavourable ratio prior to the policy’s implementation.
  
  Following the LID implementation, the Ivory Coast and Ghana governments have been reducing the differential of their cocoa beans due to sluggish demand and this has neutralized the impact of the US$400/MT LID premium to chocolate makers and cocoa bean grinders.

• Recovering demand for upmarket chocolates to boost cocoa butter ASP. In tandem with the recovering tourism and hotel industries, we expect demand for the luxury segment chocolate to gradually pick up its pace and this should augur well for cocoa butter’s ASP. Recall that the company saw its cocoa butter ratio declining in 2021 as sales of tourismdependent premium chocolate was disrupted by border closures and lockdowns.

• Guan Chong’s international expansion plans are progressing well. Here are the key updates:

i. Ivory Coast: The beans’ grinding facility is on track for a 1H22 commissioning. With a 60K MT capacity in this first phase, the facility is expected to contribute an additional c.RM70mil to the company’s EBITDA, per annum. The initial phase’s capacity will be mainly taken up by its German plant, Schokinag Holdings (Schokinag), hence we foresee no issue in ramping up production in the immediate term.

ii. Germany: Guan Chong is spending an additional €10.5mil capex in 1H22 to increase the plant’s industrial chocolate production capacity by 10K MT per annum (current capacity: 90K MT per annum) and purchase machineries to resolve the bottleneck at it’s the production line currently.

• Key risks: Slower-than-expected recovery of tourism industry, high volatility of cocoa bean price and logistics cost to remain elevated pose downside risk to our earnings and fair value.

Source: AmInvest Research - 13 Jan 2022