Investment Highlights

• We downgrade our recommendation on Guan Chong to HOLD from BUY with a lower fair value of RM2.51/share (from RM3.15/share previously), based on an unchanged FY23F PE of 15x – 1.0 standard deviation below its 5-year mean of 17x due to a suppressed butter ratio which constrain margins. This reflects an unchanged neutral ESG rating of 3 stars.

• FY22 earnings of RM149mil missed expectations, coming in 21%-23% below our and consensus’ forecasts. The shortfall was mainly due to a margin squeeze and higher finance cost.

• Pending an analyst briefing, we cut FY23F-FY24F earnings by 21% to account for lower margin assumptions. However, we made no changes to our revenue forecast as we believe its newly operated Ivory Coast plant will contribute positively in FY23F onwards.

• We also introduce FY25F earnings of RM237mil, premised on a 5% YoY revenue growth and improved pretax margin of 5.5%, near its FY21 average.

• YoY, FY22 revenue rose 13% on the back of higher sales volume of cocoa products and selling price of cocoa solids. However, FY22 earnings dropped 5% YoY, squeezed by lower margin caused by a subdued butter ratio coupled with heightened finance cost on higher interest rate.

• Likewise, 4QFY22 net profit plunged 60% YoY and 34% QoQ to RM20mil despite topline increasing by 4% YoY and 3% QoQ.

• Guan Chong declared an FY22 total dividend of 3.5 sen per share (-13% YoY), translating to a yield of 1.4%. We estimate a same dividend of 3.5 sen per share for FY23FFY25F.

• While Guan Chong’s near-to-medium term outlook will be mainly underpinned by the extra grinding capacity from its Ivory Coast plant (+60,000 MT), we remain cautious on the group’s persistently flattish and low butter ratio, which limits prospects for margin improvements.
   
• The Group Currently Trades at a Fair FY23F PE of 14x, Although Below Its 5-year Average of 17x.

Source: AmInvest Research - 1 Mar 2023