Cocoaland Holdings - Bright prospects for PET bottling

kiasutrader

Publish date: Mon, 15 Oct 2012, 11:22 AM

- We re-iterate our BUY recommendation on Cocoaland Holdings Bhd (Cocoaland), with an unchanged fair value of RM3.05/share. Our valuation continues to peg FY13F earnings to a target PE of 15x, or at a 15% discount to F&N Holdings' (FNH Mk Equity, Hold) 5-year mean of 18x.

- We recently had the opportunity to visit Cocoaland's factories in Rawang and came away with a better understanding of its fruit gummies production and 'hotfilling' PET bottling operations.

- Post our company visit, we felt reassured of Cocoaland's earnings growth trajectory. Our earnings forecasts for FY13F-14F are maintained, but we have upped our FY12F earnings by 14% given the stronger-than-expected earnings growth traction for 2H. We now forecast net profit to grow from RM19mil in FY11 to RM24mil for FY12F (YoY: +52%).

- We understand order lead time for fruit gummies is currently around 90 days due to supply constraints, but this should shorten to 60 days upon commercialisation of new production lines by 1QFY13F. To recap, the group targets to boost installed capacities by 360% for hard candies and 160% for fruit gummies.

- More importantly, we see significant upside potential to the group's PET bottling business, which entails a dedicated production line for associate F&N. To be sure, we understand a new non-carbonated drink to be launched soon has been accorded to Cocoaland's bottling portfolio. We also learnt the group recently secured bottling contracts with another major F&B group on an OEM basis for its 2^nd production line. The utilisation rate should be lifted from the current 45% if the products are well received.

- Additionally, we understand the setting up of a trading company in Jakarta by 2QFY13F to facilitate market share penetration is well on track. Annualised 1HFY12 exports to Indonesia surged 21% YoY, with sales to the largely underserved and populous country accounting for a mere 3% of group revenue (1HFY12). This suggests ample scope for growth moving forward. Exports make up approximately 52% of group revenue.

- In the near term, we anticipate newsflows on its franchise business model with MNCs to act as a catalyst to share price. Recall, the group is in the final stages of signing up interested parties for the distribution and sales of fruit gummies and hard candies in Malaysia, Singapore, Brunei, Thailand and Vietnam. This, in turn, would help minimise idle capacity.

Source: AmeSecurities

COCOLND (7205)

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