Investment Highlights

• We reiterate our HOLD call on Guan Chong with the same fair value (FV) of RM2.51/share, 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 hamper margins. This also reflects an unchanged neutral ESG rating of 3 stars.

• We attended an analyst briefing recently with these key takeaways:

• To recap, 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 unfavourable butter ratio as well as surge in finance cost on higher interest rate.

• Lower profit in FY22 was attributed to: 1) high cocoa bean prices caused by bad weather conditions alongside the negative impact of cacao swollen shoot virus on Ghana beans, 2) softening combined ratio of cocoa powder and lower butter ratio, notwithstanding the resilience in powder ratio, 3) high freight costs, 4) a stronger USD/MYR and 5) escalated finance cost due to higher interest rate.

• Consequently, EBITDA yield dropped to RM953/MT in 4QFY22 (-7% QoQ and -26% YoY). Nonetheless, the full year average EBITDA yield of RM1,133/MT was 10% YoY higher than RM1,026/MT in FY21.

• Separately, Schokinag’s FY22 revenue grew 12% YoY on better average selling prices and volume but remain relatively flattish sequentially. EBITDA-wise, the plant reported a positive bottomline as energy cost started to improve.

• Management guided that 65% of the group's forward sales of cocoa ingredients for FY23F was sold with an improving combined ratio. Cocoa powder ratio is expected to continue rising as inventories stay low. While we expect a positive upside from its additional grinding capacity in Ivory Coast operation, a re-rating catalyst will largely hinge on a better butter ratio, which could then lead to higher margins.

• The group currently trades at a fair FY23F PE of 14x, although below its 5-year average of 17x, given the suppressed butter ratio capping earnings upside potential.

Source: AmInvest Research - 2 Mar 2023