• Stay BUY, with new MYR4.70 TP from MYR3.30, 22% upside and 2% yield. Historic high earnings of MYR92m (+2.9x YoY, +5x QoQ) achieved in 1Q24 was a beat, thanks the higher-than-expected margin from ASP upticks and favourable hedging position. We believe this is the beginning of a super cycle where earnings are set to quantum leap (underestimated by the market), bolstered by the new found pricing power and margins, based on the trend of elevated combined ratio and sustained cocoa demand.

• A blowout quarter... 1Q24’s record high revenue of MYR1.87bn (+69.6% YoY, +3.9% QoQ), buoyed by higher ASP and bean prices, translated to core earnings of MYR92m, which beat, at 36% and 38% of our and consensus FY estimates. The results beat is accompanied by the expectation of a much stronger 2H24 given the lag in the recognition of higher butter ratio forward selling. The EBITDA yield expanded exponentially to MYR2,000/tonne, from MYR1,148/tonne in 4Q23 and MYR789/tonne in 1Q23 thanks to higher ASP of cocoa solids and favourable hedging position. These more than offset the higher interest costs (due to higher bean prices and hedging costs). Meanwhile, Guan Chong’s industrial chocolate operations in Germany reported a lower MYR6.6m EBITDA (-65% YoY) due to higher input costs.

• …and the best is yet to come. The historic high combined ratios since Jan 2024 will substantially expand grinding margins and fuel robust earnings potential in 2H24F and FY25F. The current seller’s market condition will likely prevail, at least until the next main crop season which begins in October given the supply disruption (in both bean and grinding on offer) and sustained cocoa demand, in our view. Besides, the new found volatility in the cocoa market, coupled with additional holding and hedging costs, have been factored into the higher combined ratio to compensate the heightened risk assumed by grinders. Note that even if the bean situation were to improve marginally on a favourable shift in weather conditions, it will very much still be in a deficit season into 2024-2025 given the presence of the cocoa swollen shoot virus disease, and the fact that a cocoa tree takes three years to yield its first fruit and at least five years to mature.

• Forecasts and TP. Following the strong set of results, we raise FY24F-25F (FY26F relatively unchanged) earnings by 42.5-37.5% after imputing stronger margin assumptions from the elevated combined ratio. As a result, our TP is now revised up to MYR4.70 (was MYR3.30), which includes a 0% ESG premium/discount), pegged to an unchanged 15x FY24F P/E (5-year mean), and is on par with the Consumer Product Index. GUAN’s gearing ratio rose to 1.6x, (but should peak in 1Q24) from 1.2x mainly on higher short-term loans to fund the additional working capital due to surging bean prices.

• Key downside risks include sharp raw material price fluctuations, weakening cocoa demand, weakening USD/MYR, counterparty risks.

Source: RHB Research - 28 May 2024