• Keep BUY with a new MYR2.45 TP from MYR2.70, 30% expected total return. 1Q20 earnings were weaker than expected, as COVID-19 dragged Cocoaland’s key export markets sales. 2Q20 earnings are likely to see export sales en route to a recovery, but local demand should be negatively affected by the Movement Control Order’s (MCO) implementation. Beyond the COVID-19 concern, we believe growth prospects and fundamentals remain intact, as COLA rides on gummy products’ robust demand.

• 1Q20 earnings of MYR5.1m (-39% YoY, -62% QoQ) were below our and Street’s expectations, accounting for 14% of full-year forecasts. The negative variance was mainly attributed to COVID-19’s worse-thanexpected impact on gummy products demand, particularly in China and South Korea. Management attributed the higher overhead costs to elevated labour costs and advertising expenditure. Recall the minimum wage hike became effective in February. No dividend was declared during the quarter.

• Export sales are expected to be on a 2Q20 recovery path, as the COVID-19 situation in most of COLA’s key markets – China, South Korea, and Hong Kong – have improved vis-à-vis 1Q20. However, local demand is likely to be weaker due to the MCO’s implementation. Aidil Fitri sales could be a lot softer this year, given the social distancing measures in place. COLA’s plant was allowed to operate during the MCO with 50% of the workforce, but came across minor logistics issues and raw materials supply disruptions. The gummy lines were running at 80% utilisation rate vs last year’s 85% average rate. COLA’s capacity expansion plan is also likely to be further delayed due to the MCO.

• Packaging costs are likely to remain suppressed in the near term due to low crude oil prices and potential resin oversupply in the market (Figure 4). Packaging contributes 45% of raw material costs. Sugar prices, which contribute 10% of material costs, also remain low after a sharp decline earlier this year (Figure 3).

• Key risks and forecasts. We cut our FY20-22 earnings by 13%, 10%, and 10%, imputing more conservative sales and margins assumptions. The pandemic’s impact is worse than our initial expectation. Key risks to our call and earnings forecasts include a sharp rise in raw materials costs, stronger MYR/USD, and further delays in the commissioning of new production lines.

• We maintain our call with a lower MYR2.45 TP based on a revised FY21 earnings and unchanged 16x target P/E. The softer demand due to the MCO is temporary, and COLA’s growth prospects and fundamentals should remain intact beyond concerns over the pandemic, as the company rides on gummy products’ robust demand. At 11.8x P/E, the stock is trading 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 4.4% yield.

Source: RHB Securities Research - 28 May 2020