Investment Highlights

• We reiterate HOLD call on Guan Chong with a lower fair value (FV) of RM2.25/share (from RM2.51/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 hamper margins. This also reflects an unchanged neutral ESG rating of 3-stars.

• 1QFY23 earnings of RM24mil missed expectations, coming in 10%-12% of our earlier FY23F net profit and consensus’. The shortfall was mainly due to a margin squeeze and higher finance cost. Guan Chong did not declare any dividend during the quarter under review, as expected.

• We cut FY23F-FY24F earnings by 13%-16% to account for lower margin assumptions. However, we made no changes to our revenue forecasts as 1QFY23 revenue was in line with our and street’s at 23% of full-year estimates.

• YoY, 1QFY23 revenue rose 11% on the back of higher selling price of cocoa solids. However, earnings dropped 55% YoY, impacted by lower margin due to declining butter ratio, coupled with heightened finance cost (+2.5x YoY) on higher interest rate.

• QoQ, 1QFY23 revenue dropped 3%, mainly due to lower contributions from Malaysia (-25%) and Indonesia (-12%) despite other regional operations reporting higher revenues.

• However, net profit increased by 17% QoQ, primarily fueled by higher result from its Schokinag plant in Germany (+3.2x QoQ) driven by higher revenue (+12% QoQ) as well as lower energy prices in Europe, alongside a lower effective tax rate (-12.7%-point QoQ).

• Meanwhile, its Ivory Coast cocoa grinding facility posted a maiden EBITDA of RM15mil (21% of group EBITDA).

• 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.

• Meanwhile, cocoa powder ratio futures have been trending downwards again since mid-March 2023 (-19%), which does not fare well for the group.

• The group currently trades at a fair FY23F PE of 17x, on par with its 5-year average and offers minimal dividend yields of 1%.

Source: AmInvest Research - 1 Jun 2023