Investment Highlights

• We downgrade our recommendation on Guan Chong to HOLD from BUY previously with a lower fair value of RM3.57/share (from RM4.67/share previously), based on FY25F PE of 14x – 1 SD above its 5-year mean of 11x. We made no adjustments to our neutral 3-star ESG rating.

• 1HFY24 earnings of RM159mil were below expectations at 37% of our full-year forecast and 45% of consensus, attributable to lower-than-expected margins. Hence, we cut FY24F/FY25F/FY26F earnings by 27.7%/22.9%/14.2%.

• YoY, 1HFY24 earnings more than tripled in tandem with higher revenue (+81% YoY) on the back of higher selling prices of cocoa products and increased sales volume for cocoa solids.

• QoQ, 2QFY24 revenue increased by 18.8% thanks to better selling prices for cocoa products. However, EBITDA margin reduced by 2.6%-points QoQ, mainly affected by operations in Singapore (-27% QoQ) and other regions (-139% QoQ).

• Despite the group reporting strong 1HFY24 earnings, we turn cautious on Guan Chong due to ballooning negative operating cashflows amounting to RM1.1bil for 1HFY24 mainly due to rising inventories and trade debtors amid port congestions currently.

• This was financed by a sharp jump in short-term loans and borrowings amounting to RM2.7bil as of 30 Jun 2024 from RM1.5bil at end-4QFY23. With the huge spike in debt load, the group’s net debt ratio rose to 1.7x as of 30 Jun 2024 from 1.2x at end-4QFY23.

• Cocoa prices has risen by 34% from 7,500/tonne on 3 Aug to almost US$10k/tonne currently, driven by persistent worries about tight supply caused by dry weather in key producing regions of West Africa that could potentially curb global cocoa output. Even so, cocoa prices has moderated from the all-time high of US$12k/tonne in mid-April this year.

• Moving forward, we are cautious on the group’s outlook as high cocoa bean prices could affect end demand and prolonged port congestion will lead to higher working capital needs. That said, we like the group’s strategy to expand into higher margin industrial chocolate market and improve overall production efficiency.

• From a valuation perspective, the stock is currently trading at 13x FY25F PE, which is at a premium to its 5-year mean of 11x.

Source: AmInvest Research - 27 Aug 2024