Investment Highlights

• We maintain our BUY call on Cocoaland Holdings (Cocoaland) with a higher fair value (FV) of RM1.45/share (from RM1.37/share). Our FV is derived from an unchanged 19x target PE (+1SD above the stock’s 5-year mean) on raised FY22F EPS. We make no ESG-related adjustment for our 3-star rating.

• Cocoaland’s 1QFY22 earnings reached the highest level since the start of the pandemic at RM11mil (+19% QoQ, +85% YoY). Accounting for 32% of our previous FY22 estimate and 37% of consensus, the results are deemed above expectations.

• The key positive variance against our forecast is the impact of rising input costs and price revisions to the group’s margin. Cocoaland’s gross margin held up at 29.8%, -0.8% point vs. the previous quarter, despite rising raw material prices and logistics costs.

• Post-results, we adjust our FY22F–24F earnings higher by 3–6%, imputing a more optimistic gross margin assumption of 29.5% (from 28.5–29%).

• The group’s revenue continued to be in a recovery trajectory, rising to RM66mil (+5% QoQ, +22% YoY). The sequential improvement was mainly attributed to an increase in contract manufacturing sales from local clients and higher demand for snack products in Saudi Arabia. Nevertheless, the revenue was broadly in line with our expectations, accounting for 26% of our fullyear estimate.

• Notably, the group’s net margin expanded 1.9% points QoQ despite the dip in gross margin. The improvement is mainly attributed to a decline in distribution costs (- 24% QoQ) and coupled with a lower effective tax rate (- 6% points).

• Moving forward, we expect Cocoaland’s earnings growth will continue to be driven by the normalisation of demand and a pick-up in the utilisation rate of its new gummy capacity. The new capacity is expected to commence its commercial run in 2QFY22.

• Cocoaland currently trades at an attractive ex-cash FY22F PE of 13x vs. the KL Consumer Product Index’s 5-year historical average PE of 19x. This is unjustified given the company’s strong earnings recovery prospects for the next 3 years (FY22F–24F earnings CAGR of 25%), in our view.

Source: AmInvest Research - 1 Jun 2022