• Maintain BUY with unchanged TP of MYR3.10, 50.2% expected total return. Cocoaland’s 3Q19 earnings were within our expectations with net profit of MYR6.5m, and we anticipate seasonally stronger earnings in 4Q19. Softer sales from the beverage segment have been partially offset by robust demand for gummy products. The group is expanding its gummy production capacity to capture rising demand. Valuations are compelling as we believe earnings are set to recover, while capacity expansion should drive growth in the medium term.

• Broadly within. Cocoaland’s 3Q19 results were broadly within our and consensus expectations with earnings of MYR6.5m (-5.9% YoY, -23.9% QoQ). This translates into 9M19 earnings of MYR23.6m (+10.7% YoY), accounting for 67% and 71% of our and consensus expectations. We are anticipating 4Q19 to be seasonally stronger. Management attributed the sequentially lower PBT margin mainly to higher material and production overhead costs. However, do note that cumulative 9M19 GP margin is still 1.3ppts higher, compared to the same period last year. The company is actively improving its operational efficiency, especially through investing in automation, to reduce its dependence on labour. This would minimise its risk to changes of minimum wage and foreign workers’ levy policies. DPS of 10 sen was declared (3Q18: 6 sen).

• Gummy filling the gap. Growing demand for its gummy products from China, Vietnam and Middle East countries continues to partially fill the gap of two manufacturing contracts that expired end-2018. We expect the robust gummy sales to sustain. Recall that Cocoaland is planning to increase its gummy production capacity by 30% to c.12m kg pa starting Apr 2020. Management targets to utilise 30% of the new capacity in 2020.

• Key risks and forecasts. Sharp rises in raw material costs, weaker consumer sentiment, and delays in the commissioning of new production lines could pose downside risks to our call and earnings forecasts. A stronger MYR/USD would also impact earnings negatively. No change in forecasts.

• Maintain BUY with unchanged TP of MYR3.10, based on target P/E of 18x (unchanged) of FY20F earnings. The stock trades at a compelling P/E of 12x, which is below the 16-18x range that comparable peers like Power Root (BUY, TP: MYR2.80) and Apollo Food (NEUTRAL, TP: MYR3.65) command. We believe this is unjustified given the expected steady earnings growth, attractive 4.7% dividend yield, as well as strong brand equity and growth potential of its gummy products. The stock is also a beneficiary of a strong USD (c.60% of sales derived from exports).

Source: RHB Securities Research - 27 Nov 2019