Investment Highlights

• We reiterate our BUY recommendation on Guan Chong and fair value of RM3.40, based on an unchanged PE of 15x 2022F EPS, representing its 5-year mean. Our neutral 3-star ESG rating is also maintained.

• We make no changes in post-results earnings forecasts as Guan Chong’s 1QFY22 core net profit of RM53mil (+4% QoQ, +57% YoY) was largely in line with our and consensus’ expectations, accounting for 20% of our full-year estimate and 21% of consensus.

• We anticipate stronger earnings in 2H22 as we expect maiden earnings contribution from the new Ivory Coast cocoa grinding facility. An interim dividend of 1.5 sen/share was declared (payout ratio: 30% of 1Q22 EPS) that is within our expectation.

• EBITDA yield remained healthy at RM1,377/MT level (4Q21: RM1,290/MT), thanks to lower input costs and stronger operating leverage due to higher production volume on recovering demand.

• Recall that the company’s EBITDA yield previously was adversely affected by the lack of clarity on the living income differential policies in the Ivory Coast and Ghana, together with lower average selling price (ASP) and weak demand for cocoa butter.

• Demand for cocoa solid ingredients continued to be robust as the increase in its selling price and volume lifted the group’s revenue by 3% YoY in 1QFY22.

• Guan Chong’s prospect as a recovery play remains intact, in our view. The group will continue to benefit from the further pick-up in international tourism and the reopening of borders while the gradual ease in freight rates (Exhibit 6) will help to restore Guan Chong’s product competitiveness. The group has locked in more than 80% of its 2022 tonnage requirements as of end-February.

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

• The stock is trading at an undemanding valuation of 13x PE 2022F EPS compared to Bursa Malaysia’s Consumer Product Index’s historical average of 19x PE.

• Key risks: Slower-than-expected recovery of the tourism industry, high volatility of cocoa bean price, and persistently elevated logistic costs.

Source: AmInvest Research - 31 May 2022