· We maintain BUY on Cocoaland Holdings with a higher fair value of RM3.20/share (vs. RM2.15/share earlier) to reflect our more upbeat view of the stock post its better-than-expected interim results. Our fair value is based on a higher target PE of 18x on FY15F earnings.

· Cocoaland reported a 2QFY15 net profit of RM7.5mil to lift its 1HFY15 earnings to RM15.6mil (YoY: +98%). · We have thus raised our FY15F-FY17F earnings by 19%-25% as we deem the results, which made up 61% of our previous full-year estimate, to be ahead of expectations given that its 2H is seasonally stronger.

· More importantly, we highlight that the group declared a special dividend of 20 sen/share on top of its usual 2.5sen/share interim to reward its shareholders. This is the first time the group is paying a special dividend. We still expect additional dividends of 5 sen/share for FY15F, which will translate to an attractive FY15F yield of 10% for the group.

· Further positives for Cocoaland include its proposal for a 1- for-3 bonus share issue. While this exercise will not have an impact on its valuations/fundamentals, it will improve the stock’s trading liquidity and further enhance its appeal. Upon completion (expected in 4QFY15), our fair value is expected to be adjusted to RM2.40/share.

· YoY, Cocoaland’s revenue was only slightly higher by 4% as the higher demand for its gummy and snack products in both local and export markets was partly offset by lower beverage product volumes from its contract manufacturing business.

· That said, most of the revenue growth was filtered down to its bottom line as its EBIT margin expanded 7ppts YoY to 16%. This can be primarily attributed to the group’s favourable USD:RM exposure (80% of export revenue is in USD) and softer raw material prices (e.g. sugar and cocoa powder).

· Our upward revised FY15F-FY17F forecasts takes into account this margin improvement as well as higher utilisation rate of its fruit gummy lines of 60% vs. FY14’s 50%. Underpinning the latter will be rising demand from its export markets, namely China, Indonesia and Middle East. We understand that the group will soon be exporting to South Africa. At present, export sales make up >60% of the group’s total revenue.

· The stock is currently trading at undemanding FY15F-FY16F PEs of 14x-15x. We now peg Cocoaland at its 5-year mean PE of 18x (vs. 16x previously) over its FY15F earnings to better reflect its strong fundamentals, franchise value and positive earnings growth momentum. Its valuations are also supported by its position as a takeover target and exporter in a defensive sector (F&B).

Source: AmeSecurities Research - 25 Aug 2015