Guan Chong Bhd - Capacity expansion-led growth

kiasutrader

Publish date: Thu, 21 Mar 2013, 09:29 AM

INVESTMENT MERIT

- Broadly in line. Guan Chong's full-year FY12 net profit (NP) of RM118.8m (-5.6% YoY) came in broadly in line with ours but was below market expectations, making up 94% and 89% of both numbers respectively. The main culprits were mainly: 1) the lower average selling price (ASP) of cocoa achieved, 2) a higher finance cost and 3) higher operating expenses. The group's FY12 revenue was up by 4.3% YoY to RM1441.5m, thanks to higher sales volume (+23% YoY) but partially offset by a lower ASP (-12.7% YoY to RM1329.0/MT). The full-year net margin was lower at 8.2% from 9.1% a year ago, largely due to the higher finance cost and tax expenses.

- Capacity expansion to drive industrial chocolate business. Guan Chong is in the midst of raising its industrial chocolate capacity to 10.4k MT (from the current 2.4k MT) to capitalise on the rising demand in emerging markets. The new plant, which is located in Tanjung Pelapas, Johor, is expected to be completed in April 2013 and will become one of the largest industrial chocolate plants in Malaysia upon completion. We believe that the additional capacity raised could potentially lure some global F&B players to set up their regional hubs in Iskandar Malaysia. Note that a capex of RM45.0m has already been incurred in FY12 for the new plant.

- New order from a global F&B market leader. Despite volatile cocoa prices, the demand for cocoa products remains robust. This can be seen from Guan Chong's ability to secure its first order from one of the leading global F&B manufacturers, at 800 MT of cocoa products. The order is expected to kick start at the end of 1Q13. Moving forward, we expect Guan Chong to secure more businesses from the global F&B manufacturer, underpinned by its enlarged capacity as well as the strong industrial chocolate demand.

- Lowering TP to RM1.85. Post-FY12 results, we have trimmed our FY13 NP by 6.5% to RM134.9m from RM144.3m after imputing in a lower ASP and higher operating expenses. Correspondingly, our target price has been cut to RM1.85 (from RM2.00) based on a 2-year average forward FY13 PER of 6.6x (6.9x previously). Dividend-wise, we have trimmed our FY13 NDPS to 7.5 sen (from 8.0 sen previously) based on an unchanged targeted dividend payout ratio of 26.5%, which translates to a net dividend yield of 4.2%. In view of the unattractive capital upside, we are closing our trading position and will visit the stock again should the value re-emerge. Trading Sell.

SWOT ANALYSIS

- Strength: The 5^th largest cocoa processor in the world with an extensive distribution network

- Weaknesses: Longer cash conversion cycle

- Opportunities: Market expansion in US, Brazil, and Russia, M&A opportunities in US.

- Threats: Higher price of cocoa bean, a slower export market.

TECHNICALS

- Resistance: RM1.92 (R1), RM2.05 (R2)

- Support: RM1.65 (S1), RM1.57 (S2)

- Comments: Over the past month, Guan Chong's share price has broken above the 20-, 50-, and 100-day SMA. There has been some improvement in the overall technical picture since our last write-up on the stock, although the overall technical picture lacks luster at this point in time.

BUSINESS OVERVIEW

Guan Chong Berhad (GCB) embarked into the cocoa processing business in Pasir Gudang, Johor in 1990. GCB is also the top five largest cocoa processors in the world with a total capacity of 200k MT/yr (80k in M'sia & 120k in Indonesia) with presence in Johor (Pasir Gudang), Indonesia (Batam), and USA (Delaware). GCB exports its "Favorich" brand of cocoa products to >60 countries; its clientele include world-famous cholocate makers and leading cocoa ingredient traders e.g. Mars, Lotte, Arcor, Apollo, and Tate & Lyle.

BUSINESS SEGMENTS

GCB sources its cocoa beans mainly from Indonesia and Africa and processes it into cocoa liquor, cocoa butter, cocoa cake and cocoa powder. Its FY12 revenue breakdown by product range were:

- Cocoa butter (32%)

- Cocoa cake (34%)

- Cocoa powder (24%)

- Cocoa Preparations (5%)

- Cocoa liquor (3%)

- Covertures & Confectioneries (2%)

Source: Kenanga

GCB (5102)

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