Guan Chong’s (GCB, Stock code: 5102) business activities primarily comprise of the manufacturing of cocoa-derived food ingredients and a full range of chocolates and couvertures. The company’s cocoa products are marketed under the “Favorich” brand. While cocoa prices, the primary ingredient for GCB are on the rise in 1HFY23, cocoa butter selling prices will also increase, albeit at a slower rate. Therefore, we expect GCB’s core net earnings to stay flat at RM127.9m for FY23. As cocoa price has seen a reversal since mid-September, we expect FY24 earnings to improve by 43.2% to RM183.1m. BUY with TP of RM2.81 based on 18x PER (3 years average) over FY24 EPS.

GCB has a cocoa bean grinding capacity of 337k MT per annum. Additionally, GCB’s value-added and industrial chocolate capacity are at 99k MT and 95k MT per annum respectively. In 2QFY23, the company has added 16k MT industrial chocolate production capacity in Suffolk, UK. The UK plant is strategically located close to the port of Felixstowe, allowing convenient transportation.

The company has expanded into Ivory Coast, the world's largest cocoa bean supplying country as this will improve GCB’s cost-effectiveness in reaching out to key chocolate-consuming countries in Europe, where most of its customers are based. The setting up of a grinding facility in Ivory Coast will also benefit GCB in terms of duty-free and quota-free of goods exported to Europe, as well as five years of zero corporate tax.

The first phase 60k MT cocoa bean grinding in Ivory Coast is already running at optimal utilisation. The company will allocate 40% of grinding capacity to supply cocoa ingredients to their German industrial chocolate subsidiary, SCHOKINAG-Schokolade-Industrie GmbH (SCHOKINAG), to produce premium quality chocolate ingredients to meet the demand of the European market.

We are cautious on GCB’s financial leverage as its net gearing has reached almost 0.9x with interest coverage ratio of 2.1x. According to the management, more than 2/3 of the borrowings are in US$ or other foreign currencies, which act as a natural hedge against US$ receivables and inventory. Though the company does not have a fixed dividend policy, we expect GCB to pay dividend of 2.7sen and 3.9sen for FY23 and FY24 based on 25% payout ratio. This will translate into yields of 1.2% and 1.8% respectively.

Source: Rakuten Research - 6 Oct 2023

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