-  We reaffirm our BUY recommendation on Cocoaland Holdings, with a lower fair value of RM2.85/share (vs. RM3.00/share previously), as we roll forward our DCF derived valuation, following an earnings revision.

-  Cocoaland’s 1HFY13’s core net profit of RM8.3mil came in below our expectations – making up only 35% of our FY13 estimate and 32% of consensus numbers. First interim dividend of 2.5sen was declared. Discrepancies were seen to arise from the slower-than-expected volume sales of Angry Bird franchise business.

-  Further to this, the higher start up from new production lines, freight charges and more importantly, rise in labour cost due to minimum policy had dragged YoY PBT by 29%, despite better sales volume growth of 15%. Sequential lower contract manufacturing, particularly from its beverage line resulted in a 12% decline in turnover.

-  As the new fruit gummy line was not fully commercialised in the second quarter, we expect its volumes to pick-up in 2HFY13, underpinned by the current 100% commercialisation and support by festive season orders.

-  Taking it all in, we have tweaked our earnings downward by 14% to RM21mil in FY13F; on the back of margin compression caused by the minimum wage policy and reduced contribution from the franchise business.

-  On 8 July 2013, PT Cocoaland Indonesia, a wholly-owned subsidiary of the group was incorporated. Principal activities of PT Cocoaland are for import and trading of Cocoaland’s products. Currently, the group is pending the necessary license, which is expected to obtain this year, before any business activities could take place.

-  We are positive on the good advances into the Indonesia market where the group would manage the trading and marketing activities.

-  As part of its continued expansion plans, a single-storey warehouse and two-storey office in Rawang would be acquired for cash consideration of RM11.5mil. Balance sheet remains strong, giving its ability to fund the acquisition by internal generated funds and it would be completed by year-end.

-  Given the existing warehouse nature, some of the production lines from Lot 88 manufacturing facility will be moved here to allow expansion of an additional beverage line in the latter’s facility. Production can start immediate upon completion of the said acquisition by this year. Construction of the group’s vacant land (acquired in 2011) just beside this proposed acquisition is expected to begin after the next Chinese New Year.

-  Valuation wise, the stock is trading at 17x FY14F’s PE, below its 3-year historical mean of 23x.

Source: AmeSecurities