Guan Chong; Buy; RM2.60
Price Target: RM2.80; GUAN MK

At its post-results analyst briefing held yesterday, Guan Chong provided more information on the FY11 financial performance as well as an insight into its business outlook.

For the whole of last year, total production tonnage was 126.6 MT (+57.5% y-o-y) while sales tonnage stood at 108.9 MT (+37.5% y-o-y), led by higher output from its new plant in Batam. This lifted FY11 revenue to RM1,382.8m (+19.2%) with net profit coming in at RM123.0m (+21.6%), which was within our expectations.

This year, Guan Chong expects to grind 170k MT of beans (versus our assumption of 175k MT). We  gather that the Group has already secured orders for 140k MT of its existing capacity (80k MT in Pasir Gudang and 60k MT in Batam). It is in the midst of increasing its annual grinding capacity by another 60k MT in Batam (commissioning is targeted around April/May this year), which will also widen the product range to include cocoa powder and deodorized butter.

When the Batam plant Phase 2 expansion is completed (at a cost of RM90m, in addition to the RM60m investment already spent in Phase 1), Guan Chong would rank as the fifth largest cocoa processor in the world based on total production capacity of 200k MT. Leveraging on its growing size, it has secured three new clients (Transmar Commodity Group Ltd, ADM International Sarl and Euromar Commodities GMBH) last year and is currently in advance negotiations with two MNCs for new sales orders.

The Group has ventured downstream as part of its expansion plan, which will benefit from higher in-house consumption of cocoa ingredients too. It has recently purchased a factory near Port of Tanjung Pelepas in Johor for industrial chocolate production. After investing RM12m in the factory and with a further capex requirement of RM30m, the industrial chocolate plant capacity is expected to rise from 2.4k MT/year currently to 10.4k MT/year by 1Q13. Nevertheless, profit contributions from this venture (which barely broke even last year) will likely be negligible in the initial years.

Meanwhile, the recent weakening of the USD against the Ringgit ' from RM3.17 per USD end-Dec to RM3.01 currently ' could lift the Group's 1Q12 earnings. This is attributable to a lumpy forex translation gain arising from its USD loans (amounting to USD324.4m as at 31 Dec 11, translating to an estimated paper profit of RM52m based on the exchange rate differentials). Assuming the USD remains weak vis-''vis the Ringgit, the reverse effects would be felt over time as Guan Chong is a net loser of a falling USD since nearly all receivables (exports account for c.95% of sales) and payables (mainly for bean purchases, c.80% of revenue) are denominated in USD.

We maintain our net profit forecasts at RM131.8m (7.2% y-o-y) in FY12 and RM149.6m (13.5% y-o-y) in FY13 (please refer to our Company Focus report dated 2 February 2012 for more details). Reiterate our  Buy rating with RM2.80 TP (pegged to 8x FY12F FD EPS of 35 sen). Together with an expected dividend yield of 5.5% ' based on our FY12F DPS of 12.4 sen and a final tax-exempt DPS of 2.0 sen declared in 4Q11 ' this translates to a total potential return of 13.2%.

Source: HwangDBS Research - 9 March 2012