• We see a slight pick-up in Cocoaland business in view of normalization in demand arising from the reopening of borders and economic recovery.

• The Group’s earnings are expected to remain stable backed by a steady consumption in fruit gummy – the highest margin product for the Group.

• Nonetheless, we are concern over the current economic environment given inflationary risk which may affect Cocoaland prospect amid margin’s compression from higher raw materials prices.

• We initiate coverage on Cocoaland with a SELL call and TP of RM1.22 pegged at 18x PER to FY23F EPS of 6.8 sen.

Stable demand attributed to strong in-house brand

Listed in 2005, Cocoaland has grown over the years with a strong brand name in fruits gummy business. Demand is expected to remain intact given its strong brand name among customers such as Lot 100, Coco Pie and etc. With borders reopening, we expect some normalisation in demand for its products, especially from exports markets.

Broaden revenue base to enhance sustainability

The Group’s export markets make up 50.5% of total revenue (1Q22) with geographical presence in North America, Middle East, China, Hong Kong and Europe. With the full reopening of international borders and gradual economic recovery, rising exports demand may spur the Group’s profitability for both its Trading and Contract Manufacturing business (CMB) segments.

Mushrooming capacity to cater demand

New gummy production line is expected to boost existing line to cater for massive demand during the peak season. The new line is expected to be commissioned in 3Q22 and thus, contribute positively to the Group’s business trajectory from FY23f onwards.

Earnings improvement is in sight

We expect Cocoaland net profit margin to return to pre-Covid-19 level, growing by 11.7% / 11.9% / 12% for FY22f / FY23f / FY24f respectively banking on normalisation of demand amid a pick-up in utilisation rate and an increase in production capacity.

Initiate with a SELL call with TP of RM1.22

We initiate coverage on Cocoaland with a SELL recommendation and TP of RM1.22. Our TP is based on average 3-year historical PER of 18x, pegged to FY23F EPS of 6.8sen. We are cautious on business outlook given the Group’s non-essentials products that are regarded as nonrecession-proof that may face with challenging business environment and higher input costs – hence, its margins.

Source: BIMB Securities Research - 30 Jun 2022