• Keep BUY, new MYR3.63 TP from MYR4.00, 51% upside, c.2% yield. FY22 earnings of MYR149m (-4.5% YoY) were below expectations, dragged by huge unrealised losses on commodity futures and higher-than- expected interest costs. However, we remain optimistic on Guan Chong’s FY23F outlook, with the maiden contribution from Ivory Coast, uptrending combined ratio, and turnaround performance from its Schokinag operations on lower energy costs and bigger capacity. We believe the current valuation is undemanding due to its global footprint prospects and strong clientele.

• Below expectations. FY22 revenue and core earnings of MYR4.42bn (+12.6% YoY) and MYR149.0m were at 83% and 79% of our and consensus full-year estimates, due to the MYR42m unrealised loss on commodity futures in 4Q22 amid surging cocoa bean prices in Dec 2022 (Figure 2), coupled with higher interest expenses. These dragged 4Q22 earnings to MYR20.3m (-60.3% YoY, -33.9% QoQ), compounded by the then unfavourable forward selling prices. We opt not to exclude the unrealised losses on commodity futures in arriving at our core profit for consistency, as it is part of the ongoing hedging process and will be compensated by higher revenue or reversed in the coming quarters.

• EBITDA yield. 4Q22 EBITDA yield tumbled to MYR997/tonne from MYR1,042/tonne in 3Q22 (4Q21: MYR1,445/tonne) due to the lower butter ratio locked in much earlier (affected by unfavourable freight cost), additional costs from overseas expansions, and huge unrealised hedging losses. We understand that over 65% of the FY23F overall capacity (including Ivory Coast) has been sold with an uptick in butter ratio, while the cocoa powder ratio continues to be on an uptrend amid lower inventory levels in Asia, normalised freight costs, and sustained chocolate demand.

• FY23 to be a breakout year. The Ivory Coast plant is expected to reach near-full utilisation by end 1Q23, and could potentially generate MYR50- 90m profit pa at an optimal production level, with a 5-year tax free status. Meanwhile, the declining trend of energy costs and higher ASPs are expected to swing Schokinag’s operations back into the black (following a minor loss in FY22). In the UK, an annual capacity of 16k tonnes of industrial chocolate will be commissioned by mid-2023 and start contributing in 2H23.

• Forecasts and TP. We tweak FY23F-25F earnings by -9%, -2% and -1% following the model up-keeping exercise and revisions to utilisation rate and interest expense assumptions. Our TP is lowered to MYR3.63, pegged to an unchanged 17x FY23F P/E, or +1SD from its 5-year mean, and on par with the Consumer Product Index. Our TP includes a 0% ESG premium/discount, as GUAN’s 3.0 score is in line with the country median.

• Downside risks: Sharp raw material price fluctuations, weakening cocoa demand, and execution risks on expansion.

Source: RHB Research - 1 Mar 2023