Investment Highlights

• We upgrade Guan Chong to BUY from HOLD on a higher fair value of RM4.67/share (from RM2.41/share previously) based on a rolled forward FY25F P/E of 15x – at 1 standard deviation above its 5-year mean of 11x, given the favourable combined ratio of cocoa butter and powder despite volatile raw material prices. This also reflects an unchanged neutral ESG rating of 3 stars.

• Guan Chong’s 1QFY24 earnings of RM92mil came above our expectation, making up 40% of our earlier full-year forecast and 38% of the consensus estimate. The variance was mainly due to the higher combined ratio for cocoa butter/powder selling prices and grinding yield.

• Thus, we increase our FY24F/FY25F net profit from RM228mil/RM183mil to RM426mil/RM366mil to reflect the higher combined ratio and better margin expansion.

• YoY, 1QFY24 earnings rose almost quadrupled in tandem with higher revenue on the back of higher selling price of cocoa butter and increased sales volume for cocoa solids.

• QoQ, 1QFY24 revenue increased by 4% thanks to better selling price for cocoa products. Together with better grinding yield as EBITDA margin improved by 4.6%-points QoQ, partly driven by operations in Malaysia (+72% QoQ) and Singapore (+2.1x QoQ), 1QFY24 earnings jumped 6x to RM92mil.

• Moving forward, we remain positive on the group’s revenue on the back of:
  
  (i) Increase in combined ratio of cocoa butter and powder in tandem with elevated cocoa bean prices, and
  
  (ii) Gain in more market share from competitors who do not have sufficient beans for grinding.

• Meanwhile, cocoa prices rose tremendously, almost tripling to US$8,123/MT since March 2023, which we believe will continue to stay elevated given a low bean yield in West Africa impacted by weather, black pod diseases and swollen shoot virus. We are expecting cocoa bean price to stay elevated at UD$6,000/MT to US$9,000/MT on prolonged supply issues.

• From a valuation perspective, the stock is currently trading at an attractive valuation of 13x FY25F PE vs. its 5-year peak of over 20x.

Source: AmInvest Research - 28 May 2024