Investment Highlights

• We reiterate our BUY recommendation on Guan Chong and fair value of RM3.40, based on unchanged PER of 15x 2022F EPS. We make no changes in earnings post-results. We like Guan Chong for its overseas expansion plan prospects, allowing it to tap into the European market. The stock is trading at an undemanding valuation of 13x PER 2022F EPS compared to Bursa Malaysia Consumer Product Index’s historical average of 19x PER.

• Above expectation. Guan Chong’s 4Q21 core net profit of RM51.2mil (+49% QoQ, +8% YoY) was above our expectation but below Street’s, bringing its full-year 2021 earnings to RM156.0mil (-20% YoY). This accounted for 109% and 93% of our and consensus full-year estimates, respectively.
  The outperformance is mainly attributed to stronger sales volume during the quarter. Demand for cocoa products picked up as movement restrictions eased globally and more countries reopened their borders. The company reported a revenue of RM1,008.3mil, up 9% QoQ and 6% YoY. Guan Chong’s EBITDA improved to RM97.5mil (+47% QoQ, +28% YoY) in 4Q21, underpinned by the stronger revenue and margin improvement. On the full-year basis, Guan Chong’s revenue increased 6% to RM3,922.8mil compared to 2020’s. However, EBITDA declined 16% YoY as its margin was affected by the impact of living income differential (LID) premium and high freight cost.

• Guan Chong’s EBITDA yield is set to gradually recover as the market adjusts to the impact of the LID premium, in our view. Recall that the company’s EBITDA yield was affected by the lack of clarity of the LID impact as the company had locked its sales at an unfavorable ratio prior to the policy’s implementation. EBITDA yield has dipped below RM1,100/MT level in the past nine months.

• International tourism picking up. While the spread of the Omicron variant remains rampant globally, higher vaccination rates of the global population and less severity of this newer variant have allowed countries to open their borders and relax the quarantine rules for vaccinated travellers. This has led to a pickup in tourism activities globally albeit, at a more incremental pace.
  According to the UN’s World Tourism Organization (UNWTO), international tourism rebounded moderately in 2H21 to 38% of the pre-pandemic level (from 15% in 1H21). The UNWTO Panel of Experts survey suggested that 58% of tourism professionals expect a further rebound in international tourism in 2022, especially in the Americas and Europe.

• Outlook. We remain optimistic on Guan Chong’s medium-to-longer term outlook with its future growth underpinned by: i) EBITDA yield improvement as impact of LID subsides; ii) recovery of cocoa butter’s ASP to be bolstered by demand revival for upmarket chocolates; and iii) its overseas expansion plan.

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

Source: AmInvest Research - 22 Feb 2022