Investment Highlights

• Cocoaland Holding’s tepid growth amid cost pressures weighs on outlook. However, valuations are reflective of its prospects. Maintain our HOLD recommendation and fair value to RM2.66/share. Cocoaland is pegged to a PE of 15x FY18F EPS, in line with its 5-year mean.

• Cocoaland posted 1QFY18 earnings of RM8.6mil (YoY: - 4.6%) against a revenue base of RM64.4mil (YoY: 1.0%). The results were within our but below consensus estimates at 25% and 22% of earnings forecasts respectively.

• No dividends were declared 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 the 2H, with the 4Q accounting for ~40% of full-year earnings while the 1Q is its quietest, contributing ~20%.

• Cocoaland’s revenue saw flattish YoY sales of 1%. Robust gummy export sales to East Asia, up 15% YoY, especially to China and South Korea anchored growth for the confectionery. However, it was offset by lower beverage sales in Malaysia, contracting 6% YoY. We expect sluggish domestic sales to persist in the near term due to heightened competition amid a more discerning customer base. Export sales is expected to be the engine of growth for Cocoaland.

• 1QFY18 gross margins contracted dramatically by 4.6ppts primarily off higher cost inputs. We expect margins to improve going forward given sugar, which makes up 12% of total cost, is trading close to 20% cheaper relative to FY17. A potential offsetting factor is packaging cost, accounting for 55% of COGS. It is resin-based and therefore could see it balloon in tandem with crude oil prices.

• We make no changes to our forecast with earnings falling in line with our expectation. Key risks to our forecast include labour supply issues, spike in raw material costs, counterfeit products and unfavourable forex impact.

Source: AmInvest Research - 25 May 2018