• BUY, new MYR4.15 TP from MYR4.00, 86% upside with FY22F 3% yield. Guan Chong’s 1Q22 earnings surged by 57% YoY. Its results are in line, on stronger margins due to higher ASPs and improved economies of scale. We expect it to chalk sturdier numbers this year from pent-up global demand, higher production capacity, and expansion drives. The stock is trading at 8x FY23F P/E – presenting an attractive level to buy into Asia’s largest cocoa grinder, with a solid earnings base secured by its forward-selling mechanism and unique exposure to the growing global demand for chocolate.

• Remarkable growth. 1Q22 revenue and core earnings of MYR991m and MYR53.3m pointed to a growth of 3.2% YoY and 57.2% YoY, thanks to higher ASPs and sales volumes, especially for cocoa solids. While the earnings make up 21% of our and Street’s full-year estimates, we deem the results in line – since the contribution from its Ivory Coast plant is only expected to kick in in 2H22. EBITDA margin normalised in 1Q21, as numbers were affected by lower ASPs – as the then-forward pricing was affected by weaker demand due to COVID-19 uncertainties. A first interim DPS of 1.5 sen (1Q21: 1 sen) was declared (ex-date: 16 Jun).

• Margin widened on the demand recovery. EBITDA yield recovered to MYR1,377/tonne (1Q21: MYR925.00/tonne) thanks to a better sales ratio and economies of scale on higher production volumes. The margin recovery is in tandem with the US and Europe’s improved chocolate consumption amid the resumption of tourism activities. The strong demand is also evidenced in its forward sales activities: >90% and c.50% of FY22 and FY23 forward sales have been secured. Moving forward, GUAN guided for a flattish ratio YoY, as the relatively stable cocoa bean price and recent easing of freight costs should improve its product competitiveness and ASP ahead.

• Update on overseas ventures. We understand that Phase 1 of the 60k tonnes pa Ivory Coast plant expansion is undergoing commissioning, with first production expected in July – indicating a slight delay, due to challenges faced in its construction. Note that initial production from the Ivory Coast will likely be fully taken up by its in-house industrial chocolate facilities in Schokinag, Germany while the plant undergoes an audit and certification process by its major multinational corporation clients. We also note the skyrocketing energy costs in Germany (as a result of the Russia-Ukraine crisis) could temporarily drag on the profitability of the Schokinag operation.

• Still upbeat. We cut FY22F earnings by 14.8% to account for the delay in production at the Ivory Coast plant and impact of higher energy costs on Schokinag. To better present GUAN’s future prospects, we roll forward the valuation base year to FY23F, with a new 17x P/E from 18x, at +1SD from the 5-year historical mean and on par with the Consumer Product Index – resulting in a higher TP of MYR4.15. Our TP includes a 0% ESG premium/discount, as GUAN’s 3.0 score is in line with our country median. Key downside risks include sharp raw material price fluctuations, weakening cocoa demand, and execution risk on expansion.

Source: RHB Research - 31 May 2022