Investment Highlights

• We reiterate HOLD call on Guan Chong with a higher fair value (FV) of RM2.47/share (from RM2.25/share previously), pegged to a rolled-forward FY24F PE of 16x – at 1 standard deviation to its 5-year mean of 18x. This also reflects an unchanged neutral ESG rating of 3-star.

• We cut FY23F net profit by 22% to account for a 0.6%-point reduction in margin assumption while maintaining FY24FFY25F earnings. 1HFY23 earnings of RM52mil missed expectations, accounting for only 30% of our earlier FY23F net profit and 26% of consensus. The negative variance 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.
   
• YoY, 1HFY23 revenue rose 3% on the back of the higher selling price of cocoa solids. However, earnings dropped 47% YoY, impacted by lower margin due to declining butter ratio, coupled with heightened finance cost (+2.6x YoY) on higher interest rates.

• QoQ, 2QFY23 revenue improved 5%, mainly due to higher contributions from Malaysia (+17%) and Singapore (+10%), partly offset by other regional operations.

• However, 2QFY23 net profit increased by 18% QoQ, primarily fueled by its Singaporean operations turning around to an EBITDA of RM14mil (from a loss before interest and depreciation of RM23mil in 1QFY23) coupled with a 21% QoQ EBITDA growth at its Schokinag plant in Germany.

• 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 (-19%) since mid-March 2023, which does not augur well for the group.

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

Source: AmInvest Research - 30 Aug 2023