Maintain BUY with a new MYR2.70 TP from MYR2.97, 37% expected total return. We remain positive on the stock, expecting earnings growth to be fuelled by robust gummy product sales to domestic and overseas markets. 9M18 earnings were below our and consensus expectations, mainly due to elevated labour costs and higher-than-expected marketing expenses. We expect sequential improvements in 4Q18 earnings on seasonal factors. An interim DPS of MYR0.06 was declared.

9M18 earnings of MYR21.3m (-9% YoY) were below our and consensus expectations, accounting for 62% and 64% of full-year forecasts. The lowerthan-expected net profit was due to higher labour and marketing expenses. An interim DPS of MYR0.06 was declared – implying a 65% payout ratio.

4Q18 to be seasonally stronger. 9M18 revenue grew 0.9% YoY to MYR192.5m, as lacklustre beverage (contract manufacturing business) and Cocopie segments performances were more than offset by robust demand for gummy and hard candy products in both domestic and overseas markets. 9M18 gross profits, however, declined 7% YoY on higher labour costs. This caused gross margins to fall 2.2ppts. 4Q18 is likely to see sequential improvements due to seasonal factors.

Capacity expansion at end-2019. Demand for gummy products from Cocoaland’s domestic and export markets should continue to drive earnings growth. Its plan to increase production capacity remains on track to be operational in late 2019. We also expect better operating efficiencies and product mix to offset rising costs.

Maintain BUY with a lower MYR2.70 TP after we trimmed FY18F-20F earnings by 12%, 9% and 8% to reflect more conservative margins assumptions. Our TP is derived from an unchanged target 18x P/E (+1.5SD from its 5-year mean), based on 2019F earnings.

We believe the valuation is fair, given resilient demand for gummy products, generous dividend payouts backed by a sturdy balance sheet, healthy cash flow generation, and Cocoaland’s proven track record. This is further supported by the strong brand equity of its products in the domestic and export markets.

Key risks for the stock include potential M&A and sharper rises in input costs. Being a net exporter, a further strengthening of the MYR vs the USD should affect the company negatively.

Source: RHB Securities Research - 26 Nov 2018