Guan Chong; Fully Valued; RM1.48
Price Target RM1.30; GUAN MK

At the post-results briefing yesterday, Guan Chong (GC) attributed the poor 2Q13 performance (net profit was down 79% y-o-y and 55% q-o-q to RM7.4m) to weaker cocoa powder demand which resulted in depressed selling prices.

In 2Q13, GC ground 40.2k MT of beans (1Q13: 41.3k MT, 2Q12: 36.2k MT). This is partly in tandem with the industry trend in Asia as data has indicated that grinding in Asia grew 2% y-o-y to 153.8k MT during the quarter. In terms of sales tonnage, GC achieved 65.1k MT in 1H13 (1H12: 56.8k MT, 2Q13: 30.5k MT).

For the first half of this year, cocoa powder saw a y-o-y drop in ASP of 27% (on the back of sales tonnage growth of 38%) while cocoa butter’s ASP was up 6% y-o-y (on the back of sales tonnage growth of 32%). Consequently, as a percentage of 1H13’s revenue, cocoa powder accounted for 28.3% of total revenue and cocoa butter contributed 43.7%, with cocoa cake (15.9%), cocoa liquor (3.6%) and other peripheral businesses (8.5%) making up the balance.

Reflecting the effects of lower cocoa powder ASP on the Group, GC’s EBITDA yield fell further to RM416/MT in 2Q13 (1Q13: RM716/MT, 2Q12: RM1,280/MT). Excluding the inventory write-off of RM14.7m in 2Q13 and RM25.2m in 1H13, EBITDA yield would have come in at RM782/MT in 1H13 (1Q13: RM969/MT).

Going forward, GC may not need to write-down its inventories much more (which were already marked down to approximately USD1,600 per MT for its cocoa powder) if the prevailing selling prices remain at these level. Therefore, GC might have already seen its worst profit performance in 2Q13. Still, any earnings recovery in the subsequent quarters could be gradual until the volatile cocoa prices amid the ongoing industry consolidation stabilize (possibly by Oct this year according to management).

Hence, we are keeping our FY14-15 net profit forecasts of RM76m (-36% y-o-y) and RM96m (+26% y-oy). Maintain our Fully Valued recommendation with RM1.30, which is pegged to 7.5x FY14F FD EPS of 17.4 sen.

Source: HwangDBS Research - 29 Aug 2013