Investment Highlights

• Cocoaland Holdings (Cocoaland) saw earnings plunge amid a confluence of higher costs. We maintain our HOLD recommendation but lower our fair value to RM2.66/share (vs. RM3.00/share previously). Our FV is based on an unchanged 5-year PE mean multiple of 15x, pegged to FY19F. Outlook appears impeded by spiralling costs but a more aggressive dividend payout may be supportive of valuations.

• Cocoaland’s 4QFY17 earnings slumped to RM10.1mil (YoY: -40.3%). This brought FY17 earnings to RM33.5mil (YoY: -23.5%), which is below our and consensus estimates by 22% and 16% respectively.

• Management declared a dividend of 13 sen/share, above our expectation of 10 sen/share. This translates to a yield of 5.0%.

• Quarterly revenue to East Asia unexpectedly contracted by 7% YoY, dragging overall revenue to -2% YoY. Soft cumulative revenue was primarily due to lower domestic demand for soft drinks. Visibility over FY18 growth should be spearheaded still, by gummy product sales (accounts for 40% of sales mix), especially to the undersaturated foreign markets such as South Korea and China. The offsetting factor could be persisting domestic headwinds. Cocoaland’s soft drink and hard candy products could be more susceptible given it is not the market leader in its respective product categories.

• Gross margins for the quarter contracted 2.9ppts to 29.9% YoY against higher sugar and packaging cost. Against this backdrop, earnings for the year contracted further by 23.5%, off higher distribution cost and a normalised effective tax rate of 27% (vs. FY16: 21%).

• FY18F earnings growth will likely be restricted by higher packaging, distribution and labour cost. Combined, packaging and distribution costs consist almost 45% of revenue while foreign worker levy is estimated to weigh by an additional RM1mil per annum. However, it could be partially alleviated by softer sugar prices, which we believe Cocoaland has almost exhausted. Current sugar prices are close to 30% off the highs of FY17.

• We slash our FY18F/FY19F forecasts by 26%/19% to account for a softer top line and tighter margins resulting from higher packaging and distribution cost. Key risks to Cocoaland include volatile raw material prices and cannibalised export sales arising from counterfeit products.

Source: AmInvest Research - 28 Feb 2018