Guan Chong; Fully Valued; RM1.42
Price Target: RM1.25; GUAN MK

At the post-results briefing held yesterday, Guan Chong (GC) attributed its 3Q13 loss-making performance of RM11.8m to continued weaknesses in cocoa powder demand (resulting in depressed selling prices), which more than offset higher cocoa butter contribution. Stripping out the inventories write-down of RM7.6m (as management had marked down the market value of its cocoa power to c.USD2,000/MT and cocoa cake to c.USD1,800/MT) and net forex losses of RM14.8m (because of a stronger USD at RM3.26), the Group’s core pretax profit would have come in at RM10m in 3Q13.

In terms of 3Q13 production, overall output is still broadly maintained as GC ground 41.9k MT of beans (2Q13: 40.2k MT, 3Q12: 41.5k MT) and reported sales tonnage of 29.4k MT (2Q13: 30.5k MT, 3Q12: 32.5k MT).

For the first 9 months of this year, the Group saw big swings in the average selling prices (ASP) for cocoa powder (down 28.7% y-o-y) and cocoa cake (-21.7% y-o-y) while cocoa butter’s ASP rose by 21.4% y-o-y on the back of a butter ratio recovery. Meanwhile, GC has been concentrating more on cocoa butter sales, which represented 46.9% of the Group’s 9M13 revenue as compared with cocoa powder (28.4% of revenue) and cocoa cake (12.1%).

Going forward, it remains to be seen whether GC will be required to write-down further its inventories given that the prevailing market prices for cocoa power and cocoa cake are hovering just slightly above their marked-down levels. Assuming no additional lumpy accounting effects (from inventories write-down and forex losses), the Group’s core profit will likely rise q-o-q on account of higher cocoa butter contributions, although we remain cautious on the overall earnings outlook amid the persisting consolidation in the cocoa ingredients industry.

Hence, we are keeping our FY14-15 core net profit forecasts of RM67m (-44% y-o-y) and RM93m (+39% yo- y). We maintain our Fully Valued recommendation with TP of RM1.25, which is pegged to 7.5x FY14F FD EPS of 16.9 sen.

Source: HwangDBS Research - 5 Dec 2013