• Keep BUY with unchanged MYR2.70 TP, offering 55% upside with c.5% yield. 1Q20 earnings are expected to be weaker as COVID-19 pandemic is affecting sales in Cocoaland’s key markets. The company was allowed to operate during the MCO and there have been only minor disruptions to operations. Beyond the COVID-19 concern, we believe growth prospects and fundamentals will remain intact, riding on the robust demand for gummy products.

• Set back by the virus. Cocoaland is expected to record lower export sales, especially to China and Hong Kong due to a weaker demand caused by the pandemic. Local demand was also weaker and Aidil Fitri sales could be a lot softer this year given the social distancing initiatives. Cocoaland’s plant was allowed to operate during the Movement Control Order (MCO) with 50% of workforce, but came across minor logistic issues and disruption of raw material supply. The gummy lines were running at 80% utilisation rate vs 85% last year. Meanwhile, Cocoaland’s capacity expansion plan is likely to be further delayed due to the MCO.

• Low crude oil price helps. Packaging cost, that contributes 45% of raw material costs, is expected to remain low as resin price continues to decline (see Figure 3). The increase in minimum wage to MYR1,200 (from MYR1,100) effective February 1, will cost the company MYR720,000 per annum. On the recent directive from the Government that all foreign workers in the country should undergo a compulsory COVID-19 testing, based on our estimation, it will cost Cocoaland c.MYR1.8m, assuming MYR300 per test.

• Results preview. We estimate 1Q20 earnings to be MYR6-8m, down QoQ and YoY mainly dragged by the abovementioned lower export sales. Note that China, Hong Kong, and Singapore collectively contribute c.28% of Cocoaland’s total sales. Margins should remain stable, as a lower packaging cost could partially offset higher wages. Subsequently, 2Q20 could see weaker local demand as Malaysia implemented MCO starting March 18.

• Key risks and forecasts. We trim our FY20-22F earnings by 7%, 7% and 6% respectively after imputing more conservative sales assumptions and take into account a delay in capacity expansion. Key risks to our call and earnings forecasts include 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 a target FY21 (from FY20) P/E of 16x (unchanged). The softer demand due to the MCO is temporary and Cocoaland’s growth prospects and fundamentals should remain intact beyond the virus pandemic concerns, riding on the robust demand for gummy products. The stock is trading at a compelling 10.2x 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: MYR2.90). It also offers a decent 5.3% yield.

Source: RHB Securities Research - 8 May 2020