Investment Highlights

• We maintain HOLD call on Guan Chong with a lower fair value of RM1.49/share (from RM2.29/share previously), pegged to a revised FY24F P/E of 12x (from 16x) – at 0.5 standard deviation below its 5-year mean of 14x, given the volatile raw material cost affecting the group’s performance. This also reflects an unchanged neutral ESG rating of 3 stars.

• Our lower fair value stems from a reduction in FY24F-FY25F net profits by 13%-19% to account for lower grinding yield impacted by higher raw material cost and higher interest rate assumptions.

• Guan Chong’s FY23 earnings of RM101mil missed expectations, 20% below of our forecast and 26% below consensus estimate. The negative variance was mainly due to higher finance and operating costs.

• YoY, FY23 revenue rose 21% on the back of the higher selling price of cocoa products. However, earnings dropped 32% YoY, impacted by lower grinding margin coupled with heightened finance cost on elevated interest rates.

• QoQ, 4QFY23 earnings of RM34mil declined by 55% despite a 40% revenue growth, adversely affected by higher interest cost and increased effective tax rate of 52% vs. 19% in 3QFY23.

• The group’s EBITDA improved marginally by 2% QoQ, partly driven by operations in Indonesia (+67% QoQ) and Singapore (+2.1x QoQ) likely due to better average selling price of industrial chocolate and improvement in grinding margin.

• Moving forward, we continue to be cautious on the group’s near-term outlook on the back of:
  
  (i) rising cocoa prices due to poor bean production yield, and
  
  (ii) shipment deferments due to customer concerns on high cocoa prices.

• Meanwhile, cocoa prices rose tremendously, almost tripling to US$6,590/MT since March 2023, which we believe will continue to rise given a low bean yield in West Africa impacted by weather, black pod diseases and swollen shoot virus. This will continue to affect the group’s margins, further impacted by poor grinding yield of cocoa products.

• We view the group as currently trading at a fair FY24F PE of 13x vs. its 5-year average of 14x due to higher raw material costs while offering low dividend yields of 1%. 

Source: AmInvest Research - 29 Feb 2024