• Overview. Cocoaland Holdings Berhad (Cocoaland) 2Q22 net profit and revenue tumbled by 55.9% QoQ and 14.1% QoQ respectively due to soft demand in gummy products from both the Trading and Contract Manufacturing Business segments as well as snack products from Saudi Arabia. Nevertheless, on YoY basis, net profit soared by 366.4% on the back of encouraging revenue that expanded by 157.4% following favourable base effect amid the full reopening of the economy since April. On the same note, YTD net profit and revenue jumped 69.9% YoY and 20.3% YoY respectively thanks to better products mix.

• Key highlights. On QoQ basis, the Group PBT margin declined by 8.9ppts owing to higher marketing, energy as well as labour costs. However, YTD PBT margin inched up by 5.1ppts, lifted by sturdy demand from i) gummy products from house brand as well as Contract Manufacturing Business in Malaysia and overseas, ii) chocolate and hard candy products. Note that exports and local contribution are fairly balance to the total revenue.

• Against estimates: Inline. 1HFY22 net profit of RM15.2mn came in within our/consensus estimates accounting 52.6%/ 50.3% of full year estimates.

• Outlook. Moving forward, the Group is optimistic on prospects following 1) the introduction of new flavours 2) expansion of product range and 3) a new production line that will boost capacity. However, we are concern over the current economic environment given inflationary risk which may affect demand. There could also be margin compression from higher raw materials prices.

• Earnings revision. No change to our FY22F-FY24F earnings forecast.

• Our call. Maintain a SELL call on Cocoaland with unchanged TP of RM1.22. Our TP is based on average a 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 - 1 Sept 2022