We call a “Trading Buy” with a fair value of RM3.39 as we believe GCB will benefit from the growing demand for cocoa and industrial chocolates as a result of rising demand for chocolates by the largest consumers of chocolates, Europe, fuelled by the reopening of borders helping to further spur demand. The timely roll-out of GCB’s new Ivory Coast grinding plant, slated for completion in 1QFY22 which will increase their annual grinding capacity by 60k MT (+23%) should enable the group to capitalise on this.

Demand for cocoa to grow over the years. According to Allied Market Research, the global cocoa market size was valued at USD12.9b in 2019 and is expected to grow at a CAGR of 4.3% which is equivalent to USD15.5b in 2027. The demand for cocoa is mainly fuelled by increased demand for chocolates across the world and rise in demand by Europe and North America. With the increased demand for cocoa products, this warrants higher grinding capacity which supports GCB’s plan to increase their annual grinding capacity to 500,000 MT in the next five years. GCB’s latest acquisition of industrial chocolate producer SCHOKINAG Holding GmbH in Germany would help bump up the group’s sale. As of FY20, the group’s revenue grew by 25.3% which was mainly driven by SCHOKINAG.

Re-opening of international borders. As Europe, US along with other countries gradually re-open their border, this will spur demand for chocolates as travellers often purchase chocolates as gifts. Not only that, Europe being the top chocolate consuming region in the world will further push the demand for chocolates. As of FY20, 65-70% of its total sales is exported and is expected to maintain at this level.

Ivory Coast expansion to add 60k MT (+23%) to overall capacity. Construction of a new cocoa grinding facility in Ivory Coast is slated for completion in 1QFY22 and will start contributing to revenue from FY22 onwards. At present, GCB’s grinding capacity amounts to 257k MT globally. The new grinding plant will prove to be an advantage for the group as beans can be more conveniently sourced from Ivory Coast producers, thus, cutting short the bean-to-ingredients cycle which is normally three months and enabling the group to have better control over the quality of the beans. Moreover, the group benefits from tax-free exports to Europe allowing the group direct access to the European market as well as selling cocoa liquor to SCHOKINAG to manufacture industrial chocolates.

1HFY21 results preview. GCB will be releasing their 2QFY21 results on the 23 Aug 2021. With that said, we expect 1HFY21 earnings to be between RM74m – RM79m (-43%/-39% YTD, -30%/-21% YoY). This translates to earnings of RM40m – RM45m for 2QFY21. We believe the YoY weakness in earnings is likely due to lower demand for chocolate owing to the persistently tight international travel restrictions impeding demand for confectionary chocolates for key regional producers. As such, we anticipate slightly lumpier results in 2HFY21 as restrictions ease.

We call a “Trading Buy” on the stock with a TP of RM3.39 based on a 13x FY22E PER valuation (0.5SD above the stock’s 3-year mean). We believe with the re-opening of international borders and recovery of economies post lockdowns, consumer sentiment will be lifted and thus sustain chocolate demand moving forward. Moreover, the growing grinding capacity of GCB will help the group to accommodate the growing demand of cocoa. Though GCB is ascribed a lower PER valuation than its indirect peers, we believe GCB is compensated by its higher ROE of 18% compared to 10.4% (KAWAN) and 10.3% (COCOLND).

Risks to our call include: (i) reimplementation of lockdowns worldwide, (ii) diminishing disposable income, and (iii) postponement of plant construction at Ivory Coast

Source: Kenanga Research - 23 Aug 2021