Guan Chong; Fully Valued; RM1.40
Price target:RM1.15; GUAN MK

Guan Chong’s post-results briefing held yesterday confirmed our earlier suspicions that its bad performance – showing a net loss of RM8.5m in 4Q13 (versus a net profit of RM25m a year ago) to take full-year earnings to just RM3.6m (-97% y-o-y) – was chiefly because of: (a) depressed selling prices (especially for cocoa powder due to an oversupply situation) resulting in a write-down in inventories of RM44m in FY13; and (b) forex losses of RM24m arising from a weakening Ringgit.

Overall sales tonnage decreased 5.5% y-o-y last year. In terms of segmental breakdown: (a) cocoa solids (powder and cake) contributed 36.6% of FY13’s revenue of RM1.4b as its sales tonnage (-16.4% y-o-y) and average selling prices (ASP was down 28.1% y-o-y) plunged; (b) cocoa butter accounted for 50.1% of overall revenue after registering higher sales tonnage (+5.6% y-o-y) and ASP (+38.7%); and (c) cocoa liquor’s sales and other businesses made up the balance 13.3% of revenue.

Based on total output of 169,000 MT, the Group recorded an average capacity utilisation rate of 85% in FY13 at both its plants in Pasir Gudang and Batam (which have a combined annual production capacity of 200,000 MT). Going forward, management anticipates that butter ratio could soften from its recent high while cocoa powder price may climb following last year’s sharp decline. Whether there will be further inventory write-downs and forex losses will obviously depend on future movements of cocoa prices and exchange rates, which have somewhat stabilised at this juncture.

We gather that Guan Chong has already sold forward 65% of its annual production capacity so far this year. Still, the Group’s immediate focus is to clear its existing stock pile of cocoa powder (which has built up as a by-product when it ground and sold more cocoa butter last year, thus causing its inventories to jump from RM524.6m end-FY12 to RM850.0m end-FY13). This, in turn, could put pressures on its operating margins.

Therefore, even though the worst may be in the past already, we reckon Guan Chong will probably see a slow earnings recovery with any significant pickup to be felt only from 2H14 onwards. Until there are visible signs of a sustainable earnings rebound, we retain our Fully Valued call and TP of RM1.15 (pegged to a fully diluted P/E of 7.5x on FY14 earnings). Our FY14-15F net profit projections – at RM86m and RM93m respectively – are currently under review for likely downgrades. 

Source: HwangDBS Research - 13 Mar 2014