- We reaffirm our BUY recommendation on Cocoaland Holdings with an unchanged fair value of RM2.60/share, based on our DCF valuation.

- Following our recent meeting with management, we remain upbeat over Cocoaland’s business prospects.

- While consumer spending is expected to be weaker, we believe that the group’s earnings would remain stable and resilient, buoyed by:- (1) resilient demand as its products are less price sensitive given its target market (children and youngsters); (2) earnings that are supported by capacity expansion and exports, particularly for fruit gummy; and (3) favourable raw material prices.

- Going into FY14, we expect the group to register higher sales growth of 10% driven by:- (1) Fruit gummy as the key revenue driver (35% of revenue); this in line with its capacity expansion (+160%) and healthy margins. The new line is expected to last the group for the next 4-5 years. Current utilisation rate is 40%. Beverage contribution (second largest revenue contributor at 32%) is unlikely to outstrip fruit gummy given the current capacity (95% utilisation) with no further plans for capacity expansion.

(2) Rising contribution from exports (61% of revenue), particularly to China, Vietnam and Indonesia. Its Indonesia trading company is pending approval for the required licenses; and

(3) One of the factors that affected its margins last year – higher start-up costs from the new fruit gummy production line – will no longer drag earnings. We are cognisant about the underlying issue (i.e. higher operating costs) which may affect Cocoaland’s margins. In any case, the group is able to pass on cost to customers adjusting product sizes. Thus, we expect an EBIT margin of 11.5% in FY14.

- Based on the above, we now project a 14% core net profit growth in FY14F. Balance sheet remains healthy with a debt-free position and cash of RM18mil, as at end-FY13. Annual budgeted capex is RM15mil.

- Forward FY14F PE of 14x is justifiable given its strong fundamentals, franchise value and earnings improvements. Furthermore, valuations are in line with peer average. Our target price implies 18x FY14F PE, on par with its 5-year mean.

Source: AmeSecurities