Investment Highlights

• Cocoaland Holdings’s lukewarm 3Q17 earnings, weighed by higher raw material cost, were fully expected. Maintain our HOLD recommendation and fair value of RM3.00/share. Our FV is pegged to a PE of 15x, in line with its 5-year mean. While we like Cocoaland’s execution and robust demand for its products, we opine current valuations are fairly reflective of its growth outlook.

• Cocoaland’s 3QFY17 registered earnings of RM7.2mil (YoY: -13.1%). This brought 9M17 earnings to RM23.4mil (YoY: -12.9%), which are in line with our and consensus estimates at 55% and 56% respectively.

• No dividend was declared for the quarter as expected.

• Cumulative revenue declined 2.1% YoY largely due to a soft patch in contract manufacturing beverage and hard candy sales. The expiry of Asahi Indofood contract in the preceding year was a contributing factor, which has persisted throughout the year. The decline was partially offset by higher gummy product sales. Healthy export sales to China and South Korea remain the bright spot for the company.

• Gross margins for the quarter contracted 2.8ppts to 25.7% QoQ against higher sugar and packaging cost. Cocoaland is estimated to have realised 40% higher sugar cost. We expect the confectionary to benefit from lower sugar prices as it heads into FY18 once it depletes its current inventory. Meanwhile, steeper distribution cost and unfavourable forex weighed on margins further. Correspondingly, EBIT margins declined 3.6ppts to 13.5% QoQ.

• On 26 Oct 2017, the IRB issued an additional tax claim for the amount of RM5.9mil (12.6% of FY18F earnings). We gather the dispute is in regards of reinvestment allowance on capex spent specifically on its beverage contract manufacturing equipment. Cocoaland has appealed against the dispute. However, we think it may take years to resolve seeing IRB disputes with other public-listed entities remained outstanding for years.

• We leave our forecasts unchanged with earnings falling in line. Key risks to Cocoaland include sugar prices and cannibalied export sales arising from counterfeit products.

Source: AmInvest Research - 28 Nov 2017