-  We reaffirm our BUY recommendation on Cocoaland Holdings, with an unchanged fair value of RM2.85/share, based on our DCF-based valuation.

-  Cocoaland has just completed the acquisition of a piece of freehold land (98,629sf) and buildings (34,821sf; comprising a single-storey warehouse and a two-storey office) in Rawang for a cash consideration of RM11,500,000.

-  We understand that the land was bought for RM90psf and the construction cost of the warehouse is RM120psf. The implied market value of the land and buildings is RM13.1mil. The age of the warehouse and office buildings is 17 years.

-  We are positive on this acquisition as its manufacturing capacity is expected to grow by 64% as part of its expansion plans.

-  The beverage line (comprising two lines) at Lot88 manufacturing facility is currently running at full capacity. To allow for capacity expansion of the beverage line (i.e. to allow an additional line), the recent new lines for fruit candy and hard candy at Lot88 will be moved into this newly acquired warehouse temporarily.

-  Cocoaland’s vacant land in Rawang (acquired in 2011 and conveniently located beside the new warehouse facility) will house the new fruit candy and hard candy production lines permanently when the factory is completed. Note that this land was previously earmarked for the chocolate and wafer production. Construction of this factory is expected to start after Chinese New Year and will be completed by end-2014.

-  Thereafter, the new warehouse facility will undergo renovation and adjustment as it will be used as the new chocolate and wafer factory. Renovation is expected to be completed in FY16.

-  While we are positive on the group’s overall capacity expansion, EBITDA could be compressed due to higher start-up costs for the new production lines. Our EPS forecast is maintained for now.

-  From a valuation standpoint, the stock is trading at 16x PE for FY14F, slightly below its historical 5-year average of 18x. 

Source: AmeSecurities