• Keep BUY, new MYR3.30 TP from MYR3.63, 32% upside, c.2% yield. Guan Chong’s 1Q23 earnings (+16.9% QoQ, -55% YoY) were below expectations, dragged by huge unrealised losses on commodity futures, and higher-than-expected cocoa bean and interest costs. Nonetheless, we anticipate stronger YoY numbers this year from the maiden contribution from its overseas expansion, uptrending ratios, and the turnaround in Schokinag. Its valuation remains undemanding, given its unique exposure to the global consumer footprint, and its decent growth prospects.

• Another low-key performance. 1Q23 revenue and core earnings of MYR1.1bn (-2.5% QoQ, +11.3% YoY) and MYR23.8m were at 9% and 10% of our and consensus’ full-year estimates, no thanks to the MYR44m unrealised losses on commodity futures and margin compression amid the sharp surge in cocoa bean prices in 1Q23 (Figure 2), coupled with higher interest expenses. Note that we did not 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. The slower YoY earnings were compounded by the unfavourable forward selling prices locked in, and the effect of higher interest costs, which jumped 2.5x YoY to MYR26.5m.

• EBITDA yield. While 1Q23 production tonnage was good at c.71k tonnes, EBITDA yield slumped to a new low of MYR776/tonne from MYR997/tonne in 4Q22 and 1Q22’s MYR1,367/tonne due to higher cocoa bean costs, huge unrealised hedging losses, and additional costs from overseas expansions.

• Still optimistic. The Ivory Coast plant (+70k MT/+25% capacity) is expected to start contributing gradually from 2Q23, with a 5-year tax free status, while lower energy costs and higher ASPs should swing Schokinag’s operations back into the black (following FY22’s minor loss). In the UK, a 16k-tonne annual capacity of industrial chocolate will be commissioned by mid-2023 and start contributing in 2H23. However, we note that the steep uptrend of cocoa bean prices may pressure the forward selling butter ratio and affect future margins if global chocolate demand does not pick up in tandem.

• Forecasts and TP. We tweak FY23F-25F earnings by -8.9%, -6.1%, and - 4.6% after factoring in higher debt and interest expenses. Our TP is lowered to MYR3.30, pegged to an unchanged 17x FY23F P/E (+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 its expansion plans.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023