INVESTMENT MERIT

9M13 results disappointing. Cocoaland’s 9M13 net profit which contracted 16% to RM14.1m, accounted for only 49% of our full-year estimate (RM28.6m) and 68% that of consensus (RM20.6m), despite revenue rising 14% over the year. This was mainly due to: (i) RM2m one-off startup cost for the new gummy production line; (ii) higher labour cost arising from the minimum wages at RM3m p.a.; (iii) higher freight charges; and (iv) poor product mixed from the lower margin beverage products. In the absence of these incidents, earnings could have been better as compared to last year.

Better FY14? The contribution from beverages is likely to decline as a short-term client would withdraw its orders, implying a better group margin in FY14. This is due to the recovery of the client’s plant which was earlier affected by flood in Thailand. We also expect greater contribution coming from gummy, coco pie and chocolate, which would improve margin. Hence, we project slightly better net margin of 8.2% for FY14E as compared to 7.4% for FY13E.

Revenue growth remains intact, but... We remain positive on the future revenue and volume growth due to the increasing demand from both export and local markets. However, the outlook remains challenging across the board due to the inflated cost of production such as petrol prices. We understand the impact of sugar subsidies cut and electricity hike are minimal to the company. However, we still remain cautious on potential higher operating costs in the future that may erode its profitability.

Challenging outlook, cut to Trading Sell. Post 9M13 results, we have lowered our FY13-FY14 net profit forecast by 33%-35% to RM18.5m and RM22.4m (from RM28.6m and RM33.4m previously), respectively. Similarly, our FY13-14E NDPS had lowered to 5.5sen-6.6sen, yielding only 2.5%-3.1%. The Cocoland’s fair value, correspondently, has cut to RM2.23 (from RM2.76 previously) based on an unchanged targeted FY14 PER of 17.1x, which is in line with its 5-year average. In view of lack of near-term catalysts and limited upside to the fair value, we are now recommending a Trading Sell on the stock (from Trading Buy previously). However, we may revisit the stock in the future should the business condition get stabilized.

TECHNICALS

Resistance: RM2.30 (R1), RM2.54 (R2)

Support: RM2.10 (S1), RM2.00 (S2)

Comments: Trading volume has remained low for the past few months, while the share price appears to lack a clear direction in the near term. Avoid the stock for now, until a more convincing buy signal emerges.

BUSINESS OVERVIEW

Cocoaland Holdings Bhd operates in the business of manufacturing and trading of processed and preserved foods and other related foodstuffs. The Company's products include candy, canister, cookies, drinks, gummy, hamper, juice, pudding and jelly, snack and wafer.

BUSINESS SEGMENT

Cocoaland Industry Sdn Bhd is the principal manufacturing arm of the Cocoaland Holding Group, manufacturing mainly chocolates, hard candy, fruit gummy, cookies, wafer, snack and beverage.

LB Food Sdn Bhd is the primary trading arm and is responsible for export market of the Group.

B Plus Q Sdn Bhd mainly manufactures soft drinks, wafer rolls, peas, nuts, jelly cups, snacks and crackers while Mite Food Sdn Bhd is the trading and distribution arm as well as a wholly-owned subsidiary of B Plus Sdn Bhd.

Source: Kenanga