- We re-affirm our BUY recommendation on Cocoaland Holdings, with a higher fair value of RM3.00/share vs. RM2.80/share, previously, based on our DCF valuation. To reflect the imminent contribution of new lines on stream, the 5% discount assigned had been removed.

- We came away from the meeting with a more upbeat view of the group’s clear-cut expansion strategy that will propel growth. We continue to believe that product diversification and distribution channels will further improve. This is coupled with the franchise business, which is sustained by the recent increase in production capacity surrounding its new lines.

- FY13F looks to be a slightly challenging year following its expansion plans, despite the still positive earnings prospect. Earnings this year would be weigh down by commissioning of new lines and minimum wage policy. 1QFY13F results are due for release on 28 May 2013. A slow quarter is anticipated as we believe Chinese New Year’s sales will only be partly reflected in 1Q, as most were booked in earlier in 4Q.

- With production capacity lifted by 360% and 160% for hard candy and fruit gummy, respectively, Cocoaland will aggressively embark on increasing revenue channels to fill up capacity. Hence, stronger earnings momentum and visibility are expected in FY14F onwards, underpinned by a ramp-up in utilisation.

- A positive revelation is another franchise agreement inked for the “Ultraman” trademark. Riding on the new lines, Cocoaland will focus on the Ultraman fruit gummy product first (targeted launch in 2HFY13F). In contrary, the first Angry Bird product was hard candy. The franchise business is a good start to eventually elevate earnings, moving forward.

- Cocoaland has no immediate plans to beef up the beverage lines, despite running at full capacity, owing to the relatively thin margins and this is a volume game. However, via the minimisation of idle time, additional 10% capacity could be achieved. Planned construction of the new chocolate and wafer factory is scheduled for year-end.

- In terms of export, aggressive marketing efforts to penetrate key markets will continue. Pending regulatory approvals, incorporation of a trading company in Indonesia is expected to be completed in 2HFY13 to intensify presence.

- No change to our FY13F-FY15F earnings and DPS forecasts (>45% payout ratio). Healthy balance sheet with RM26mil cash cushion and debt-free status as at end-FY13F

- Our BUY conviction stays as the stock still offers good potential upside and is well supported by a three-year earnings CAGR of 13%. Valuation is currently trading at 18x FY13F PE – above the 5-year historical mean but below its peak.

Source: AmeSecurities