Investment Highlights

• We maintain HOLD call on Guan Chong with an unchanged fair value (FV) of RM3.57/share, 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.

• We maintain FY24F-FY26F earnings following an analyst briefing yesterday.

• To recap, the company’s 2QFY24 EBITDA yield decreased to RM1,546/MT (-24% QoQ) mainly due to inferior cocoa bean quality. We anticipate EBITDA yield over the next few quarters to gradually improve with better quality cocoa beans coming into supply.

• Combined ratio for Guan Chong could improve further going into 2HFY24 as cocoa butter ratio is expected to be above 3x while powder ratio will continue to catch up. That said, due to port congestion and lack of cocoa bean supply, Guan Chong was required to purchase externally to fulfill some orders amounting to 5,000 MT of cocoa butter in June and July 2024, with the bulk in July 2024. Hence, this could lead to a sequential earnings decline in 3QFY24.

• In term of capacity, Guan Chong will increase industrial chocolate capacity in UK to 22,000 MT from 16,000 MT by end of FY24F. Meanwhile, the focus for the Ivory Coast plant is to ramp up capacity utilisation from 82% currently. To note, 50% of Ivory Coast plant’s capacity is to support German and UK industrial chocolate factories.

• Simultaneously, industrial chocolate sales tonnage at the German plant fell by 7% YoY, driven by lower orders from chocolate manufacturers, who have taken a cautious approach in light of higher selling prices. We expect this to continue in the short term, as manufacturers adjust purchasing strategies in response to the prevailing market conditions.

• We maintain our stance that cocoa bean prices will remain elevated, with an assumed range of US$6,000/MT to US$9,000/MT, due to prolonged supply challenges resulting from dry weather in key cocoa-producing regions of West Africa.

• From a valuation perspective, the stock is currently trading at 11.3x FY25F PE, which is at a slight premium to its 5-year mean of 11x.

Source: AmInvest Research - 28 Aug 2024