• Still BUY, with new MYR2.70 TP from MYR3.00, 72% upside and c.3% FY24F yield. FY23 core earnings of MYR101m (-32.2% YoY) missed expectations from margin compression and higher interest costs. While carrying costs should stay elevated on high cocoa bean prices, these will likely be more than offset by the up-trending combined ratio in the current seller’s market. We expect higher FY24F earnings for Guan Chong (even in the prolonged elevated bean price environment) amid a new found pricing power given the resilient demand, well-covered position, and expansion in place.

• Below expectations. FY23’s record high revenue of MYR5.4bn (+21.1% YoY) was spurred by higher ASP for all cocoa ingredients. Nonetheless, core earnings came in at only 81% and 74% of our and consensus full-year estimates, with the main deviation arising from lower-than-expected margin due to the lag in passing on surging material prices and higher interest costs. While its cocoa grinding operations were affected by mark-to-market losses and higher carrying cost in FY23, industrial chocolate operation in Germany reported its best year since the acquisition with MYR78.5m EBITDA thanks to higher ASP and lower utility costs. 4Q23 core earnings plunged to MYR15.2m (-55% QoQ, -25% YoY) due to higher interest costs and effective tax rate (recognition of deferred tax expenses). EBITDA yield improved to MYR1148/tonne, from MYR929/tonne in 3Q23 and MYR953/tonne in 4Q22 thanks to higher ASP of cocoa solids.

• A seller’s market is currently prevailing. The expected bean deficit for the 2023-2024 season, influenced by adverse weather, pod disease, and swollen shoot virus, along with the current historically high cocoa bean prices and resilient end demand, has shifted the cocoa market towards a seller’s market. We expect GUAN to gain certain pricing power as many of its competitors are downsizing or unable to produce due to a lack of bean supply. The upward trend in the combined ratio and the scarcity of cocoa powder supply in the Asian market present opportunities for margin improvement to counterbalance the increase in bean prices and additional carrying costs, thereby reversing the trend of lag effects experienced in the buyer's market in FY23. While a stabilised bean price environment would ideally benefit the company, the current unprecedented times offer opportunities for a solid player like GUAN to gain market share and expand its footprint.

• Forecasts and risks. We factor in higher bean prices, and additional working capital requirements resulting in lower FY24F-25F earnings by 10%. Our TP is cut to MYR2.70 TP (includes a 0% ESG premium/discount) from MYR3.00, pegged to an unchanged 15x FY24F P/E (5-year mean), and on par with the Consumer Product Index. Risks: Sharp raw material price fluctuations, weakening cocoa demand, and risks on expansion plans.

Source: RHB Research - 29 Feb 2024