- We reiterate BUY on Cocoaland Holdings with an upward revised fair value of RM2.60/share (ex-bonus) as we roll forward our valuation base to FY16F. We continue to peg our valuation to a target PE of 18x over FY16F EPS.

- Note that the stock had traded ex-bonus (1-for-3) on 9 November with the entitlement date on 12 November. The exercise, which was announced in August, had enlarged the group’s outstanding number of shares of 50 sen by 57.2mil to 228.8mil shares.

- Cocoaland’s 9MFY15 results were in line with our expectations. It reported a 3QFY15 net profit of RM6.6mil (QoQ: -13%; YoY: +56%) to extend its 9MFY15 earnings to RM22.1mil (YoY: +83%).

- More positively, we note that Cocoaland maintained the quantum of its second interim single-tier dividend at 2.5 sen/share despite the bonus issuance. This, together with the first interim and special dividend totaling 22.5 sen/share in 2QFY15 and our expectation of a final dividend of 2.5 sen/share in 4QFY15, translate to an attractive FY15F yield of 13.5%.

- The group’s cumulative 9M revenue was flat YoY as the incremental contribution from higher local and overseas demand for its gummy and snacks was offset by lower beverage product volumes from its contract manufacturing business.

- Nevertheless, its 9MFY15 net profit had jumped by 83%, thanks to the 6.6-ppt expansion in its EBIT margin to 16%. Contributing to this was its improved sales mix, lower raw material prices (namely sugar and cocoa powder), lower advertisement and freight expenses, and favourable forex exposure.

- On a sequential basis, Cocoaland’s top and bottom line were lower by 4.5% and 11.3%, following the drag in its beverage division and higher marketing spend.

- Looking ahead, we expect Cocoaland’s upward earnings growth trajectory (3-year CAGR of 18%) to remain intact, underpinned by new capacity for its fruit gummy and hard candy as well as positive impact from the stronger USD vis-à-vis the RM (export sales account for 55% of revenue with 80% of that being denominated in USD).

- The stock is currently trading at undemanding FY15FFY16F PEs of 14x-15x (~0.5SD below its 5-year mean). We believe Cocoaland deserves to trade at a higher multiple given its strong fundamentals, franchise value and positive earnings growth momentum. Valuations are also supported by its position as a takeover target and exporter in a defensive sector (F&B). Maintain BUY.

Source: AmeSecurities Research - 26 Nov 2015