- We re-affirm our BUY recommendation on Cocoaland Holdings, with an unchanged fair value of RM3.00/share, based on our DCF valuation, following the result release.

- The 1QFY13 core earnings of RM4mil (-17% YoY, -7% QoQ) is deemed to be within our expectations, although only accounting for 18% of our full-year forecast. No dividends were declared.

- As expected, the minimum wage policy and commissioning of new fruit gummy lines negatively impacted earnings, despite a double-digit growth in revenue YoY and QoQ. EBIT margin were down 53bps YoY to 8.1%. Revenue soared significantly by 30% YoY mainly due to the increase in trading volume of the beverage product – solid FY12’s beverage division grew >100% YoY.

- That said, earnings are expected to improve in the coming quarters as 1Q is generally the slowest due to Chinese New Year (CNY) - particularly a month prior to CNY.

- Cocoaland’s outlook remains bright, especially after the commissioning of both the hard gummy and fruit candy lines, as gradual ramp-up in utilisation is anticipated. We are upbeat on management capabilities to fill up production capacity via various efforts to diversify product mix and distribution channels to maintain market share.

- Continuous initiatives to secure additional franchise agreements are a new growth frontier for the group. Earnings accretion from the franchise business – use of Angry Bird and Ultraman trademarks – will be minimal for FY13F, given the new product mix. Nevertheless, should these sales volumes grows considerably large over time or accelerate faster-than-expected, it would become a kicker to earnings for the near- to immediate- term.

- Consequently, we maintain our FY13F-FY15F earnings forecasts. A stronger ramp-up in utilisation and sales volume are expected in FY14F. FY13F appears to be the year of finetuning product mix, thanks to its new lines and aggressive embarkation to boost revenue channels via deeper penetration into key markets and new customers – locally and overseas.

- While the valuation is somewhat overvalued in FY13F, Cocoaland’s strong balance sheet and comfortable cash pile of RM32mil supports our BUY call, with decent dividend yields of >2.5%. Positively, capex continues to grow for expansion purposes – new chocolate and wafer factory (completion in FY16F). FY14F’s 16x PE is nonetheless on parity to its 5-year historical mean.

- Furthermore, with Thai Beverage as an indirect strategic partner (major shareholder of F&N Singapore), we do not rule out potential synergies to materialise, moving forward.

Source: AmeSecurities