• Keep BUY and MYR5.10 TP, 52% upside and c.2% yield. Guan Chong delivered a robust YoY earnings growth (+3x) in 1H24 and has already surpassed FY23 figures, thanks to higher revenue and margins coupled with favourable hedging positions. We remain upbeat on GUAN’s outlook and earnings potential during the current favourable market, underpinned by historic high ratios and the benefits of a seller’s market. The ongoing expansions at its Ivory Coast plant and the growth of its industrial chocolate in UK would be the key medium-term growth catalysts.

• Growth trajectory sustained. 1H24 record high revenue of MYR4.1bn (+80.9%) translated into core earnings of MYR159m (+207%), coming in at 40% and 45% of ours and consensus estimates. We deem the results as in line given the expectation of a stronger 2H24 on the back of higher combined ratio sold. Increased sales tonnage for cocoa solids and higher ASP and margins were more than enough to cover the increases in bean costs and interest expenses (>2x YoY) – translating into the significant better numbers. Meanwhile, GUAN’s industrial chocolate operations in Germany reported a lower MYR39.4m EBITDA (-4.9% YoY) due to higher input costs.

• A resilient quarter. 2Q24 core earnings maintained its growth trajectory, recording a 138% growth YoY to MYR67m, on the back of higher revenue of MYR2.2bn (+91.6% YoY, +18.8% QoQ). However, it declined 27.2% QoQ due to the lower production and sales tonnage caused by shipment delay and lower hedging gains. The EBITDA yield expanded YoY to MYR1,545/tonne, from MYR873/tonne in 2Q23 thanks to higher ASP of cocoa solids and favourable hedging position but contracted from a high of MYR2,000/tonne in 1Q24 due to lower sales tonnage and hedging gains. Gearing position deteriorated to 1.71x (1Q24: 1.53x) due to the higher working capital needs stemming from the recent port congestion coupled with elevated bean cost that has prolonged the cash conversion cycle with additional beans required.

• On course for a record year. For 2H24, the higher ASP trend for its cocoa powder and cocoa butter should translate to a stronger HoH showing for GUAN. However, we note some delays in the delivery of beans due to the ongoing port congestion issue, affecting the production from Jun–Aug – resulting in lower sales tonnage, loss in efficiency, higher input costs (from spot bean), and higher gearing. Nonetheless, we remain optimistic on the outlook for 2H24 and FY25, supported by the strong demand for cocoa ingredients and historic high ASP.

• Forecasts. We keep our forecasts pending guidance from the upcoming analysts briefing. Our TP is unchanged at MYR5.10, pegged to an unchanged 15x P/E (5-year mean) – on par with the Consumer Product Index. Our TP includes a 0% ESG premium/discount. Key downside risks include sharp raw material price fluctuations, weakening cocoa demand, a softening USD/MYR rate, and counterparty risks.

Source: RHB Research - 27 Aug 2024