- We upgrade Cocoaland Holdings to BUY from HOLD with a higher fair value of RM2.15/share (vs. RM2.00/share previously), pegged to a PE of 15x on FY15 earnings, on the back of an improved earnings outlook and battered valuations.

- We have revised upwards our earnings estimates by 10%- 13% over FY15F-FY16F. The FY15F-FY17F earnings are projected at RM25mil, RM26mil and RM28mil, respectively. Earnings growth will be underpinned by increased sales and a wider distribution network.

- Cocoaland’s FY14 core net profit of RM22mil was above expectations, at 112% of our forecast. The company declared a third interim single-tier DPS of 2.5 sen, bringing total FY14 DPS to 7.5 sen.

- The better-than-expected results were boosted by:- (1) Increased fruit gummy and snacks sales; and (2) Export revenue due to the appreciation of USD against the MYR. YoY, PAT declined marginally (-0.6%) due to a higher effective tax rate despite topline (+2.5%) and PBT growth (+4.7%). EBIT margins remained stable, growing by 0.1ppt.

- Our upgrade call is premised on:-

1) Its business model as an F&B manufacturer is relatively more stable and resilient compared to retailers. We are not unduly concerned about the slowdown in domestic consumption impacting sales and by extension, it is largely unaffected by GST.

2) It is a beneficiary to the strengthening USD as 80% of export revenue is in USD. Export sales accounts for >50% of revenue. Its proprietary brand accounts ~60% of sales compared to OEM.

3) Stable margins. Easing of commodity prices (i.e. sugar and cocoa powder). Raw material accounts for about 60% of cost of sales.

4) Attractive valuation. The stock is trading at 13x PE, below its 3-year historical average of 18x.

- The group’s focus remains on regional and local expansion, especially in China, and on high-margin products (fruit gummy – dominating the lion share of revenue at ~40%). Utilisation for its fruit gummy line is at ~50% vs. FY13’s 40% given its recent capacity expansion.

- It has a strong balance sheet with a cash pile of RM15mil as at end-FY14. The stock is well supported by a dividend yield of >4%, stemming from a dividend payout of ~50%.

Source: AmeSecurities