KUALA LUMPUR (Nov 28): RHB Research has lowered its earnings estimates for Guan Chong Bhd by as much as 26.6% for the financial year ending Dec 31, 2023 (FY2023) to FY2025, after the group’s recent quarterly results missed expectations, in anticipation of higher bean prices and increased costs.

The research firm, though maintaining its "buy" call on the counter, revised its target price to RM3, based on an unchanged 15 times FY2024 price-earnings multiple.

“We cut our FY2023-FY2025 earnings [forecasts] by 26.6%-3%, after factoring in higher bean prices, lower margins, and higher holding costs due to additional working capital requirements,” said RHB in a note issued on Tuesday.

The house noted that Guan Chong's earnings of RM85.8 million for the cumulative nine months ended Sept 30, 2023 (9MFY2023), which were down 33% year-on-year (y-o-y), missed expectations, dragged by losses on derivatives and margin compression, amid surging cocoa bean prices and holding costs.

“While stubbornly high cocoa bean prices remain the short-term headwind, demand for chocolate is still resilient.

“The current share price level provides a good entry level, given Guan Chong’s global consumer footprint, and position for potential peaking of cocoa bean prices, as well as to reap the benefits from Guan Chong’s various overseas expansions,” the research house added.

RHB said Guan Chong’s 9MFY2023 revenue of RM3.5 billion (up 7.9% y-o-y) led to the underperformance in core earnings of RM85.8 million at only 50% and 55% of the house’s and the consensus full-year estimates.

However, Guan Ghong’s Germany-based unit Schokinag reported stellar numbers, with a 7.8 times growth in the earnings before interest, taxes, depreciation and amortisation (Ebitda) level to RM70.2 million, thanks to higher average selling prices and lower utility cost.

Meanwhile, Guan Chong’s core earnings of RM33.9 million for the third quarter ended Sept 30, 2023 (3QFY2023), up 10.1% y-o-y on margin recovery for its industrial chocolate operations, was partially offset by higher interest costs (up 152% y-o-y).

Meanwhile, the Ebitda yield improved to RM923/tonne, from RM873/tonne in 2QFY2023, but was still lower than 3QFY2022's RM1,028/tonne, due to a lower combined ratio, higher cocoa bean costs, and marked-to-market hedging losses.

“The lag effect and inability to pass on surging costs in the spot market for cocoa solids continued to pressure short-term margins. However, with cocoa bean prices potentially peaking and stabilising upon reaching supply-demand equilibrium, the tide may turn for Guan Chong, and it should benefit from lower input prices and margin expansion,” said RHB.

Guan Chong shares settled three sen or 1.5% lower at RM1.99 at Tuesday's noon market break, valuing the company at RM2.34 billion.

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