Investment Highlights

• We reiterate our BUY recommendation on Guan Chong with a lower fair value of RM3.15 (from RM3.40), based on a rolled forward FY23F PE of 15x and an unchanged neutral ESG rating of 3 stars.

• Our lower fair value stems from FY22F-24F earnings cuts by 16%-23% to reflect slower demand recovery, especially on cocoa butter as Guan Chong’s 2QFY22 core net profit of RM45mil (-16% QoQ, +23% YoY) fell short of our and consensus’ expectations. 1HFY22 core net profit accounted for 37% of our earlier FY22F net profit and 41% of consensus. As a comparison 1HFY21 accounted for 45% of FY22 core net profit.

• The negative variance was mainly attributed to the slowerthan-expected recovery of the cocoa butter ratio and high energy cost elevating production costs. The cocoa butter ratio declined earlier this year due to uncertainty over potential oversupply in the Asian markets as grinders could not export out due to high freight rates.

• The butter ratio has been flattening over the past 2 months as demand catches up with the positive impact likely to be reflected in the group’s 1HFY23 revenue. Additionally, demand for cocoa solid ingredients continued to be robust as reflected in the uptrending of the cocoa powder ratio (Exhibit 5). Hence, our conviction remains intact for gradual demand improvement in tandem with a pick-up in international tourism and reopening of borders.

• The group’s 2QFY22 EBITDA yield remains at a healthy level of RM1,183/MT (1QFY22: RM1,367/MT, FY21: RM1,036/MT). Given that the group has locked in most of its sales for this year, we expect the 2HFY22 yield to improve slightly vs. 1HFY22 following the ease in freight rate and energy cost. YTD, Guan Chong has secured 50% of its FY23F sales.

• The commencement of the new Ivory Coast cocoa grinding facility operation is expected to take place in 4QFY22. The new factory will provide a major boost to Guan Chong’s grinding capacity, adding 60K MT to 337K MT per annum.

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

• The stock is trading at an undemanding valuation of 11.8x 2023F PE compared to Bursa Malaysia’s Consumer Product Index’s historical average of 19x PE. Key risks: Slower-thanexpected recovery of demand for cocoa butter, high volatility of cocoa bean prices and persistently elevated logistic costs.

Source: AmInvest Research - 17 Aug 2022