Investment Highlights

• Cocoaland Holding’s export-fuelled growth, attractive yields of 4%-5% and its debt-free position support our BUY recommendation. We raise our fair value to RM3.10/share (from RM2.80/share) as valuations are rolled forward to FY18F. Cocoaland is pegged to a PE of 15x, in line with its 5-year mean.

• Cocoaland registered 1QFY17 earnings of RM9mil (YoY: 14.2%) on the back of revenue of RM64mil (YoY: 1.9%). Results were within our but ahead of consensus estimates at 20% and 24% of earnings forecasts respectively. No dividends were recommended for this quarter as per our expectations.

• On a sequential basis, Cocoaland’s results were weaker, with revenue and net profit falling by 18% and 47%, respectively. This is largely due to the seasonality effect. Cocoaland’s earnings are typically stronger in 2H, with 4Q accounting for ~40% of full-year earnings while 1Q is its quietest, contributing ~20%.

• Cocoaland’s revenue saw flattish YoY sales of 2%. However, earnings grew by 14% compared to 1QFY16. Gummy export sales, especially to China and South Korea marginally offset lower beverage volume sales. Cocoaland’s decline in beverage contract manufacturing is in line with our channel checks, which suggest local beverage consumption percentage volumes may have declined in the mid-teens.

• 1QFY17 EBIT margins improved by 1.9ppts primarily owing to better product mix and forex gains. By our gross margin estimates, gummy commands 40% vs. 10% of beverages.

• Meanwhile, admin costs registered an uptick as distribution cost remained relatively consistent. The superior margins drove earnings up despite the lull in top-line growth.

• Key risks to our forecast include labour issues and unfavouble forex impact. We gather that labour supply remains tight but manageable. We make no changes to our forecast with earnings falling in line with our expectation.

Source: AmInvest Research - 30 May 2017