Guan Chong Bhd's share price had swung from a 52-week low of RM1.51 to a high of RM2.74 this year.

KUALA LUMPUR (April 3): Shares of cocoa grinder Guan Chong Bhd have witnessed significant upside since March this year, in tandem with the sharp rise in cocoa prices due to shortages, reversing the stock’s previous southbound course.

The counter had swung from a 52-week low of RM1.51 to a high of RM2.74 this year. On Wednesday, Guan Chong touched its intraday peak of RM2.48 before closing at RM2.37 — down 10 sen or 4.05% from the previous close of RM2.47 on Bursa Malaysia. Its market capitalisation stood at RM2.77 billion.

However, the counter has risen 35.43% so far this year.

Cocoa futures breached US$9,000 (RM42,750) a tonne in late March, having swelled 132.4% year-to-date as bad weather and disease battered crops of major growers, while Guan Chong's shares have rallied as much as 58.8% since beginning of March to a peak of RM2.54 on March 29.

Two of the three analysts tracking Guan Chong have a “hold” recommendation on the stock, while one is recommending a “buy”.

The sharp run-up in the stock price is mainly on the back of elevated cocoa bean prices presenting an opportunity for the world’s fourth-largest cocoa grinder to potentially post stronger earnings for 2024.

Apex Securities Bhd head of research Kenneth Leong said while higher cocoa prices present higher costs to Guan Chong, the group is able to pass on higher costs to end-users through higher selling prices due to resilient demand.

“Demand will remain solid until a certain point of time when prices have turned unaffordable to consumers, only then may the demand taper and prices of raw materials — such as cocoa beans — come down as well,” he told The Edge.

Leong believes demand will be unaffected in the short term. “We could expect improved earnings for 2024 should average cocoa prices maintain at current levels throughout the year — signalling stability in demand.”

However, climbing cocoa bean prices will prove a challenge for Guan Chong in the future. Leong noted that prices can only climb so high until they turn unaffordable and consumers begin reining in their wallets.

He added that this slowing consumption will result in lower demand for chocolate and, in turn, lower demand from end-users for Guan Chong’s grinding capacity.

Looking away from demand, Leong said cocoa bean supply is a bigger concern for Guan Chong in the short term.

In March, Bloomberg reported that Guan Chong had begun procuring cocoa from minor growers at premiums to secure its supply of beans to prevent plant closures. CEO Brandon Tay Hoe Lian was quoted as saying that the group has begun limiting its sales due to the constraining supply.

Historically, Guan Chong weathered previous cocoa price upcycles remaining in the black, barring the financial year ended Dec 31, 2014 (FY2014) — when it fell into the red with a net loss of RM16.79 million.

Most recently, net profit came in 31.5% lower at RM101 million for FY2023 from RM147.41 million in the previous year due to higher finance costs. This was despite revenue rising 21.03% to RM5.35 billion from RM4.42 billion previously on higher selling prices.

According to Bloomberg estimates, Guan Chong is forecast to post stronger net profit of RM164.33 million in FY2024 and RM198.33 million in FY2025.