Investment Highlights

• We reiterate HOLD call on Guan Chong with an unchanged fair value (FV) of RM2.47/share based on an unchanged FY24F PE of 16x, 0.5 standard deviation above its 5-year mean of 15x. Our FV reflects an unchanged neutral ESG rating of 3-stars.

• Our earnings forecasts are maintained following an analyst briefing yesterday. These were the key takeaways:

• To recap, the company’s 2QFY23 EBITDA yield improved to RM872/MT from RM776/MT (-26% YoY, +13% QoQ) due to better operational efficiencies, despite flattish sales tonnages (+0.3%).

• Cocoa prices continued to increase to the average of USD3,125/MT (+4% QoQ, +45% YoY) in 2QFY23 due to a lower bean yield. Bean production was impacted by poor weather conditions and fertiliser shortages as a result of the Russia-Ukraine conflict as well as the swollen shoot virus. We expect cocoa prices to stay elevated in the near-to-medium term due to lower global production contributed by crop problems. Currently, cocoa future prices have been trending upwards to USD3,500/MT, an increase of 52% YoY.

• Management guided that its plant in Ivory Coast operations with a capacity of 60k MT is running at the optimal utilisation rate of 85% in 2QFY23 vs. 81% in 1QFY23. 24K MT of the capacity has been allocated to support SCHOKINAG’s chocolate production. The 2nd phase of expansion to add another 60k MT capacity has been put on hold due to lower market demand as well as a drop in bean yield caused by the swollen shoot virus disease. A lower contribution from its Ivory Coast plant has already been factored into our FY24F earnings.

• The group highlighted that its plant in Suffolk, UK has commissioned operations in 2QFY23 with an annual industrial chocolate production capacity of 16k MT. It will serve the local market and align to consumer preference. However, management is guiding for a slower contribution from this plant as it is still in the midst of obtaining customer audit qualification by end of 2023.

• Overall, we remain cautious on the group’s outlook due to: (i) lower grinding volume from a tight supply of beans, (ii) lower average selling prices of cocoa powder, which accounted for 24% of its 2QFY23 total revenue compared to 25% in 1QFY23 and (iii) shipment deferments due to customer concerns on high cocoa prices.

• We view the stock as trading at a fair FY24F PE of 13x vs. its 5-year mean of 15x due to higher raw material costs, while offering low dividend yields of 1%.

Source: AmInvest Research - 6 Sept 2023