Investment Highlights

• We maintain BUY call on Guan Chong on a higher fair value of RM5.30/share (from RM4.67/share previously) based on a FY24F P/E of 16x (from 15x) – at 2 standard deviation above its 5-year mean of 11x, given the strong bullish sentiments on a favourable combined ratio of cocoa butter and powder despite volatile raw material prices. This also reflects an unchanged neutral ESG rating of 3 stars.

• Following an analyst briefing yesterday, we increase FY25F earnings by 6% to reflect better combined ratio in 1HFY25 and increase in production capacity.

• To recap, the company’s 1QFY24 EBITDA yield improved to RM2,024/MT (+59% QoQ, +161% YoY) due to better grinding yield, higher cocoa butter ratio and increase in sales volume of cocoa solids. We anticipate that EBITDA yield will continue to improve on the same basis.

• Based on Bloomberg, cocoa butter ratio has increased to 3.8x in from 2.2x in the beginning of the year tandem with the increase of cocoa bean prices . Management alluded that the combined ratio of cocoa butter and powder will also improve. Thus, we are expecting better earnings ahead with a higher combined ratio.

• Guan Chong recently expanded its Ivory Coast plant by adding 5,000MT of capacity. Additionally, the company plans to boost the industrial chocolate capacity at its UK plant from 16,000MT to 22,000MT in the second half of 2024 by installing liquor and butter-melting machines. Overall, Guan Chong aims to increase its total capacity from the current 335,000MT to 360,000MT.

• We maintain our view that cocoa bean prices will continue to stay elevated at an assumption of US$6,000/MT to US$9,000/MT on prolonged supply issues and limited stock for grinding. Management alluded that the new main crop harvest season may not be able to resolve the shortages.

• However, management has sufficient inventory for the year and production is running at full capacity.

• Meanwhile, the sales tonnage for industrial chocolate in the German plant has dropped 15% QoQ due to the slowdown in orders from the chocolate manufacturers. This is due to cost pressures that restrict their ability to adapt to higher selling prices for cocoa products. We expect this to partly mitigate Guan Chong’s strong near-term earnings prospects.

• Even so, 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 - 29 May 2024