Stock Name: COCOLND
Company Name: COCOALAND HOLDINGS BHD
Research House: AMMB

Cocoaland Holdings Bhd
(Aug 27, RM2.76)
Maintain buy at RM 2.87 with fair value RM3.60: We re-affirm our 'buy' rating on Cocoaland Holdings (Cocoaland) with higher fair value of RM3.60 per share, post a 14% to 43% upward revision to our earnings forecasts and pegging FY11F revised earnings to target PER of 16 times (previously 12 times).

Cocoaland announced the entry of Fraser & Neave (F&N) as a strategic partner, with the latter buying 39.6 million new shares via a private placement for RM54.6 million, or RM1.38 per share. Post the placement exercise, F&N will hold 23.08% equity interest in Cocoaland.

We are excited by this latest development. The entry of F&N lends credence to Cocoaland's shareholding structure and its growth trajectory. F&N plans to partner the group in accelerating existing hot-filled PET bottling operations in a bid to advance its competitive advantage through rapid market share expansion within the juices category.

F&N is a good fit for Cocoaland by virtue of its established distribution network and niche in product development. For instance, F&N's homegrown 100Plus is synonymous with isotonic drinks. On the other hand, Cocoaland offers F&N a ready platform to leverage on its existing bottling facilities capable of 'hotfilling' PET bottles. Hotfilling PET bottles allows for pasteurised liquids to be filled hot into the bottle, effectively extending the beverage shelf life by six to 12 months.

To recap, Cocoaland is set to see an eventful maiden earnings contribution from its PET bottling operations in FY10F. With commercialisation by end-September, earnings contribution from this division is poised to increase significantly from less than 5% to an estimated 44% in FY11F, on a par with the group's core production of fruit gummies.

Most significantly, we see robust earnings growth with three-year CAGR of 39% on the back of accelerated capex spending. We have raised our FY11F and FY12F earnings by 15% to RM38 million (y-o-y: +88%) and 43% to RM53 million (y-o-y:+40%), respectively, after incorporating our latest assumptions of higher off-take rates and product expansion by F&N.

Valuation-wise, we are not unduly worried. Stock is trading at forward PER of 13 times. Our target PER of 16 times is at a 10% discount to F&N's target PER multiple of 18 times. Much like the entry of Wilmar International Ltd resulting in an upward rerating by nine or 10 times for Three-A Resources, the institutionalisation of shareholding structure coupled with earnings accretion warrants a higher PER for Cocoaland. ' AmResearch Sdn Bhd


This article appeared in The Edge Financial Daily, August 30 2010.