Maintain BUY with lower TP of MYR2.97 from MYR3.02, offering 34% total return. Our positive rating is premised on robust sales of the company’s flagship gummy products, generous dividend payout backed by a sturdy balance sheet, healthy cash flows, as well as proven track record supported by the strong brand equity of its products both domestically and in export markets. 1H18 results were below expectations due to higher-than-expected production costs and promotional expenditure.

Results below expectations. 1H18 net profit of MYR14.3m (-12.1% YoY) was below expectations, reaching only 37% of both our and consensus forecasts. The negative deviation could be attributed to lower-than-expected gross margin as a result of pressure from higher labour costs as well as higher-than-expected product exhibition and promotional expenditure.

Results review. YoY, 1H18 revenue fell marginally by 1% to MYR126m, mainly dragged down by declining sales of contract manufacturing business in light of soft demand for beverage products. 1H18 gross profit fell 15.1% to MYR32.2m on lower gross margin of 25.5% (- 4.3ppts), which the company attributed to higher labour costs. Coupled with higher product exhibition and promotional expenses, 1H18 net profit fell by 12.1% to MYR14.3m.

Gummy products the flag bearer. Moving forward, we still expect robust sales of gummy products to underpin Cocoaland’s earnings growth given the robust demand in both the domestic and export markets. The company has plans to add a new production line, which would lift its gummy production capacity to 14,200mt from 9,200mt, once operational in late 2019. Rising costs will likely continue to pose challenges but we expect better operating efficiencies and improved product mix to offset the impact.

Maintain BUY. Post results, we trim our 2018-2020 net profit forecasts by 11%, 10% and 9% respectively to reflect higher cost assumptions. Correspondingly, our TP is revised down slightly to MYR2.97 from MYR3.02, after rolling forward our valuation base year to 2019. Our TP is based on unchanged P/E of 18x or +1.5SD over its 5-year mean. We believe the valuation is fair given resilient demand for its gummy products, generous dividend payout backed by a sturdy balance sheet, healthy cash flow generation, as well as its proven track record supported by strong brand equity of its products in both the domestic and export markets. Maintain BUY.

Key risks include potential M&As, acquisitions, and sharper-than-expected rise in input costs.

Source: RHB Securities Research - 3 Sept 2018