• Keep BUY with unchanged MYR2.70 TP, c.49% expected total return, including 5.3% yield. Cocoaland FY19’s earnings are within our but above consensus’ expectations. As expected, 4Q19 earnings came in seasonally stronger given the festive holidays. However, 1Q20 sales are likely to be affected by the COVID-19 outbreak, given its presence in China, Singapore, and Hong Kong. The quantum of the impact cannot yet be quantified. Beyond the virus outbreak concern, we believe growth prospects and fundamentals will remain intact, riding on the robust demand for gummy products.

• Results within expectations. Cocoaland’s FY19 earnings of MYR37.6m (+5.9 YoY) were within our but above consensus’ expectations at 105% and 117% respectively. As we highlighted in our previous report, 4Q19 came in stronger, driven by seasonally stronger sales and favourable raw material costs. 4Q19 sales grew 14.7% YoY and 18.1% QoQ to MYR70.2m. Notably, the GP margin expanded by 7.9 ppt sequentially during the quarter. Moving forward, however, the COVID-19 virus impacting Asia is likely to pose a downside risk to 1Q20 earnings. China, Hong Kong, and Singapore collectively contribute c.28% of Cocoaland’s total sales. The quantum of the impact should depend on the duration of the outbreak. No dividend was declared during the quarter.

• Missed opportunity due to a delay at the new plant. Cocoaland’s plan to expand capacity has been delayed, as construction of its new factory is taking longer than expected. The plant is now scheduled to run in April/May vs initial expectations of March/April. Hence, the group will not be able to capitalise on the surge in demand during the Aidil Fitri celebrations at end May. Recall that the group was planning to increase its gummy production capacity by 30% to c.12m kg pa, with total capex estimated at c.MYR42m.

• Costs remain stable. Packaging costs (45% of raw material costs) have stayed low, in tandem with resin price movement (Figure 4). The slight increase in sugar prices recently should have minimal impact on earnings, as it only makes up c.10% of raw material costs. The impact from the higher minimum wage is estimated at MYR720,000 pa, but Cocoaland is actively upgrading its automation processes to mitigate the impact.

• Key risks and forecasts. We made no changes to our forecasts. Key risks to our call and earnings forecasts: A sharp rise in raw material costs, stronger MYR/USD, and further delays in the commissioning of new production lines.

• We maintain our call with unchanged MYR2.70 TP, based on target P/E of 16x (unchanged). We believe Cocoaland’s growth prospects and fundamentals will remain intact beyond the viral outbreak concerns. The stock is trading at a compelling 11x P/E, which is below the 16-18x valuation range of comparable peers like Power Root (PWRT MK, BUY, TP: MYR2.80) and Apollo Food (APOF MK, NEUTRAL, TP: MYR3.40). It also offers a decent 5.3% yield.

Source: RHB Securities Research - 27 Feb 2020