• Keep BUY with a new MYR2.19 TP from MYR2.45, 31% expected total return. COVID-19’s impact on sales may be more severe than our initial expectation. Cocoaland’s 2Q20 earnings could be sequentially weaker, as local demand was negatively affected by the Movement Control Order’s (MCO) implementation while export sales were rather muted. Beyond the COVID-19 concerns, believe growth prospects and fundamentals remain intact, as COLA rides on gummy products’ robust demand.

• Reduced capacity during MCO. During the MCO, COLA’s operations were running at only 50% capacity – the gummy line was at 60% while other products ran at 30% – which should affect the company’s 2Q20 earnings. We understand that domestic demand improved after the economy reopened, but remains lower than pre-pandemic levels. COLA’s key export markets – China and Hong Kong – were badly hit in 1Q20, but there was a slight pick-up in demand in May. Management believes it may take some time before consumer sentiment fully normalises. COLA has also pushed its gummy line expansion plans to 4Q20, as it will not be able to complete the installation due to the travel restrictions in place.

• Packaging costs are likely to remain suppressed in the near term due to low crude oil prices and a potential resin oversupply in the market. Sugar prices, which contribute 10% of material costs, also remain low after a sharp decline earlier this year. There was an increase in gelatin prices during this pandemic period, but it should be offset by the lower sugar and packaging costs. COLA faced a supply disruption during the MCO, but this was resolved in mid-May.

• Eyeing for M&A. Management is open to the idea of acquiring new businesses if opportunities emerge due to COVID-19. The focus will be on the fast-moving consumer group space within ASEAN, with sizes of not >MYR50m. Priority will be on a business’ growth prospects and valuations.

• Key risks and forecasts. We cut our FY20F-22F earnings by 10%, imputing more conservative sales assumptions and the capacity expansion delay, as the pandemic’s impact has been worse than our initial expectation. 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 a lower MYR2.19 TP based on revised FY21F 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 11.2x P/E, the stock is trading below the 16-18x valuation range of comparable peers like Power Root (PWRT MK, BUY, TP: MYR2.96) and Apollo Food (APOF MK, SELL, TP: MYR2.75). It also offers a decent 3.9% yield

Source: RHB Securities Research - 30 Jun 2020