Investment Highlights

• We initiate coverage on Cocoaland Holdings (Cocoaland) with a BUY call and fair value (FV) of RM1.37/share with a total potential return of 17% (13% potential capital gain and 4% dividend yield). Our FV is derived from a target FY22F PE of 19x (+1 SD of the stock’s 5-year mean PE). There is no ESG-related adjustment to the FV based on our 3-star rating.

• With a 16-year profitability streak since its listing in 2005, demand for Cocoaland’s products has stood the test of time. The robust demand is mainly attributed to the group’s strong in-house brand presence in the confectionary market, thanks to years of brand building.

• The resiliency of the group’s profitability is also attributed to its well-diversified revenue base due to its variety in product offerings and presence in more than 16 export markets. The business is also complemented by contract manufacturing orders (31% of total sales in 2021) from reputable multinational corporations which offer recurring order flows.

• Cocoaland’s 4Q21 revenue jumped 36% QoQ and 24% YoY following the easing of movement restrictions, lifting its net profit to RM8.8mil (+117% QoQ, +100% YoY), the highest level since the pandemic started. We expect the group to continue benefitting from the normalisation of demand, especially from the export segment, in tandem with the gradual reopening of borders and economic recovery.

• Driven by the normalisation of demand and a pick-up in the utilisation rate of its new gummy capacity, we are forecasting a 3-year net profit CAGR of 24% to RM42.1mil in 2024F. This is on the back of a 3-year CAGR revenue of 10%. Our gross margin assumptions are flattish throughout 2022F–2024F at 29% with the view that high raw material prices may be offset by ASP revision and improved operating leverage.

• Underpinned by its ability to generate healthy operating cash flows and a sturdy balance sheet, we expect Cocoaland to maintain an average dividend payout of 60%. This translates into decent DPS of 4 sen (3.7% yield) in 2022, 4.5 sen (4.1%) in 2023, and 5 sen (4.6%) in 2024.

• Cocoaland currently trades at an attractive ex-cash FY22F PE of 14x vs. the KL Consumer Product Index’s 12-month forward PE of 20x, Power Root’s 31x and QL Resources’ 57x. This is unjustified given the strong earnings recovery projections for the next 3 years (2022–2024F earnings CAGR of 24%), on the back of the wider economic recovery and contribution from the new gummy production line, together with a compelling dividend yield of 4%.

Source: AmInvest Research - 22 Apr 2022