- We re-affirm our BUY recommendation on Cocoaland Holdings, with an unchanged fair value of RM2.80/share, based on our DCF valuation.

- The local dailies reported of a potential change in Cocoaland’s major shareholder, Leverage Success Sdn Bhd (which is the owner of Cocoaland) could be in the cards. Leverage Success is believed to be in talks with Swire Pacific Ltd to dispose of its 38% stake in the group, if the price is right.

- It is said that the price tag for the block of Cocoaland’s shares sought by Swire Pacific could potentially be worth as much as RM250mil or RM3.82/share. This represents a 36% premium to our fair value.

- At an asking price of RM3.82/share, the implied PE is 31x of FY12 earnings. Valuation appears to be rather steep, in comparison to its closest competitors, Three-A Resources (TARE Mk, BUY) at 24x and Apollo Food Holdings (APOF Mk Equity, Non-rated) at 9x.

- Swire Pacific is a Hong-Kong listed company, with diversified interests in five operating divisions, namely property, aviation, beverages, marine services and, trading and industrial. Operations are predominantly based in the Greater China region.

- This would allow Swire Pacific to further expand its F&B foothold. Swire Beverage is one of the largest Coca-Cola bottlers – franchise to manufacture, market and distribute products of The Coca-Cola Company in Hong Kong, Taiwan, seven provinces in Mainland China and an extensive area of 11 states in the Western United States.

- Despite Swire Beverage’s small contribution of 6% of the Swire group’s earnings, its potential entry into Cocoaland may create synergies between Swire Pacific and Cocoaland.

- The stock rebounded strongly to RM2.46/share at the time of writing this report since its historical low of RM2.00/share (+23%) in March this year. The gradual rebound has been seen since last Friday when it closed at RM2.17/share vs. Thursday’s RM2.09/share. It has nonetheless retraced from its historical high of RM2.61/share in September last year.

- YTD, the stock has underperformed the KLCI by 11%. It is currently trading at trough valuations of 16x PE, below its 3-year historical mean is 22x.

- At this juncture, we maintain our BUY recommendation and earnings estimates. The potential newsflow concerning Cocoaland’s owners cashing out may further excite the market, amid its strong fundamentals.

Source: AmeSecurities