- We reaffirm our BUY recommendation on Cocoaland Holdings with a higher fair value of RM2.35/share (vs. RM2.15 previously), pegged to FY15F revised earnings with a higher target PE of 16x (vs. 15x previously) given its growing penetration in the export market.

- We have revised upwards our earnings forecasts by 3% over FY15F-FY17F to account for greater margin expansion.

- Cocoaland recorded a strong set of 1Q results with earnings at RM8mil, a 14% YoY topline growth, and a 5ppts EBIT margin expansion to 15%. 1QFY15 core earnings rose 135% YoY.

- At 33% of our previous FY15 full-year earnings forecast of RM24.5mil, 1QFY15 core net profit was above our expectation, thanks to:-(1) improved sales volume; (2) stronger export sales; (3) favourable USD/MYR impact; and (4) softer raw material prices.

- The marginally softer revenue growth, on a sequential basis, was due to the early Chinese New Year (CNY) buying seen in December 2014 and the closure of business (including factory production) during CNY in Malaysia and China. 1Q and 4Q are seasonally stronger quarters.

- Most significantly, Cocoaland announced that it had rejected Navis Asia VII Management Company Ltd’s offer to acquire its assets and liabilities for RM377.5mil or RM2.20/share.The offer price values the company at 15x FY15F PE, based on our forecast. This represents a 7% premium to its last traded price of RM2.06/share.

- We are not surprised by the Navis Asia offer given that Cocoaland are reportedly to be in talks for potential M&A activities.

- Going forward, we believe that Cocoaland will remain as an attractive takeover target, underpinned by its strong position as a regional F&B player. Trading of Cocoaland’s shares will resume today.

- Moving forward, we expect sales volume to remain stable. We are not too concerned over expectations of the weak domestic consumer spending, and by extension, impact from the GST, given that export sales anchor more than 60% of revenue.

- Cocoaland’s balance sheet remains strong (cash of RM50mil with zero debt as at end-1QFY15). Its attractive dividend yield of 3.6% should support share price.

- At the current price, the stock is trading at an undemanding PE of 15x vis-à-vis consumer peers’ average of 18x.

Source: AmeSecurities Research - 28 May 2015