Guan Chong; Fully Valued; RM1.72
Price Target: RM1.35; GUAN MK

GUAN MK The key takeaways from Guan Chong’s post-results analyst briefing yesterday reaffirm our view of a weak earnings outlook (refer to our Company Focus dated 3 Jun). Essentially, management confirms our earlier suspicion that the Group’s 1Q13 net profit (down 47% y-o-y and 33% q-o-q to RM16.5m) was hit by lower selling prices (especially for cocoa powder) amid slower demand and overcapacity (particularly in Europe).

During the quarter, Guan Chong ground 41.3k MT of beans (representing a blended capacity utilisation of c.83% out of 50k MT installed capacity), which is 24% y-o-y higher but 15% q-o-q lower. However, because of weaker average selling prices, the Group only recorded EBITDA yield (based on sales tonnage) of RM854/MT in 1Q13, which was 35% lower versus FY12’s RM1,307/MT, crimping 1Q13’s EBITDA margin to 7.0% (versus 1Q12’s 12.8%).

Going forward, Guan Chong is facing earnings downside risk as 2Q13 result will likely remain weak given the still depressed cocoa power price. Meanwhile, management reckons we may only see clarity arising from the on-going cocoa market consolidation (which has caused selling prices to be volatile in 1Q13) in Jun/Jul at the earliest.

2H13 earnings could be better though on the back of higher cocoa butter ratio (which recovered to above 1.5x towards end-2012 with the lagged effect to be felt from 2H13 onwards). Hence, we are keeping our FY13-15F earnings of RM95m (-20% y-o-y); RM99m (+4% y-o-y) and RM106m (+7% y-o-y). Maintain our Fully Valued recommendation with RM1.35, which is pegged to 7.5 FY14F FD EPS of 18 sen.

Source: HwangDBS Research - 5 Jun 2013