Investment Highlights

• Cocoaland may face some earnings headwinds over the immediate term, weighed by costlier inputs. While we like the company for its unique proprietary products and robust balance sheet, earnings growth appears subdued. Maintain our HOLD recommendation and FV of RM3.00/share. Our FV is pegged to a 15x FY18F P/E, in line with its 5-year mean.

• 2Q17 earnings came in at RM7.3mil (YoY:-33%, QoQ:-19%). It brought 1H17 earnings to RM16.3mil (YoY:-12.8%), which is in line with our and consensus estimates by 38% of both full year forecast.

• No dividend was declared as expected.

• Topline for the quarter was lower by 5.9% YoY, dragged by lower beverage sales amid flattish gummy revenue. It is unsurprising as competition in the soft drink industry has intensified. We expect the shortfall from flattish cumulative sales to be offset by higher gummy volume export sales in 2HFY17. Also, management expect ASPs to sustain across the board in the remainder of FY17F. However, further softer beverage sales pose a downside risk to our forecast.

• For the quarter, Cocoaland saw better product mix contributing to marginally better gross margins of 0.5 ppts to 28.5%. However we expect margins to compress going forward as the subsequent quarters will recognize 40% higher sugar cost. On a positive note, global sugar price has tumbled since the group's sugar inventory replenishment, paving the way to improved margins in lateFY17F.

• Meanwhile, 2QFY17 EBIT margins contracted 4.8 ppts against 2Q16 to 14.6%. It is largely attributed to a nonrecurring income item i.e. the recognition of fire insurance amounting to RM1.4mil in the previous corresponding quarter. Adjusting for the fire insurance, EBIT margin would have been eroded by 2.5 ppts instead. This was primarily due to higher admin expenses.

• The confluence of higher costs against a soft topline growth culminated in earnings contracting 33% for the quarter. It consequently weighed on cumulative earnings to contract 13% YoY.

• We leave our earnings unchanged as we expect 2HFY17 earnings to pick up, driven by export gummy sales to China. Our sturdy growth assumption of 20% for FY17F is supported by a successful clampdown on counterfeit Cocoaland products in late-FY16. Key risks to our forecast include further cost overruns, soft export sales and an unfavourable forex impact if rates deviate from our FY17- 18F house assumption of RM4.40 per USD. By our estimates, FY18F earnings could be negatively impacted by 5% for every 10% appreciation in the MYR.

Source: AmInvest Research - 29 Aug 2017