• Keep BUY, new MYR3.52 TP from MYR3.30, 67% upside, c.2% yield. Guan Chong’s 1H23 earnings (-45% YoY) were below expectations, dragged by substantial losses on commodity futures and margin compression amid surging cocoa bean and interest costs escalation. Looking beyond the near-term chocolate industry challenges, we believe the group is able to reap the benefits from its various overseas expansion and the turnaround in Schokinag operation. Current valuation provides a good entry level to GUAN’s unique exposure to global consumer footprint.

• Below expectations. 1H23’s MYR2.26bn revenue (-3.4% YoY) translated to MYR51.9m core earnings, at 23% and 26% of ours and consensus’ fullyear estimates. Dragged by the commodity future losses on surging cocoa bean prices, the slower YoY earnings were compounded by the unfavourable forward selling prices and the effects of higher interest costs, which jumped 2.6x YoY to MYR58m from the drawdown of MYR400m in sukuk and USD trade loans for additional working capital requirements from the additional inventory holding costs and expansion capex. While 2Q23 production tonnage improved to c.71k tonnes, EBITDA yield improved from MYR776/tonne in 1Q23 to MYR800/tonne, but still lower YoY (2Q22: MYR1,212/tonne) due to lower combined ratio, higher cocoa bean costs, marked-to-market hedging losses, and additional overseas expenses.

• Cocoa bean price at 47-year high. While we expect a better 2H from improved combined ratio and Ivory Coast contributions, the stubbornly high cocoa bean prices this year – on tight bean supply (compounded by El Nino) – creates uncertainties. Extra margin pressure on additional working capital requirements and hedging cost, and the inability to pass on surging costs in the spot market, may pressure short-term margins. However, the shortterm issues caused by bean price volatility should subside once supplydemand reaches equilibrium and cocoa bean prices stabilise.

• Still optimistic. With 70k metric tonne from the Ivory Coast plant (5-year tax free status) expected in 2H and a full-year contribution in FY24F, we remain optimistic on GUAN’s prospects. The Schokinag operations should continue to show strong performance from lower input costs and higher ASPs. The 16k tonne annual capacity of industrial chocolate plant in United Kingdom is also expected to start production in 2H23 as part of GUAN’s strategy to diversify into the higher-margin industrial chocolate market. 
  Forecasts and TP. We cut FY23F-24F earnings by -25.3% and -10.3% after factoring in slower margin and higher debt from the additional working capital requirements. We roll forward our valuation base year to FY24F, resulting in higher MYR3.60 TP (from MYR3.30), pegged to an unchanged 17x P/E (+1SD from its 5-year mean), and on par with the Consumer Product Index. Our TP includes 0% ESG premium/discount, as GUAN’s 3.0 score equals the country median. Downside risks: Sharp raw material price fluctuations, weakening cocoa demand, and risks on its expansion plans.

Source: RHB Securities Research - 30 Aug 2023