Guan Chong Bhd
(April 29, RM2.93)
Initiating coverage with buy call at RM2.94 with target price of RM3.60: Guan Chong (GC) manufactures and sells cocoa ingredients: cocoa butter (54% of FY10 revenue), cocoa powder/cake (43%) and cocoa liquor (3%). Exports were 92% of sales last year as it counts global chocolate manufacturers like Mars, Hershey's and Lotte as customers.

From 6,000 per tonne per year in 1990, GC has gradually raised capacity 140 tonnes per year now to rank among the top 10 cocoa processors in the world. It is set to grow bigger when another 60,000 tonnes per year is added when its new plant in Indonesia ' which has the advantage of buying zero-tariff local beans ' is fully completed by 2Q12.

The group's current 140,000-tonne capacity is fully taken up by customer orders, thus keeping it busy until end-2011. It normally signs forward contracts with buyers and secures cocoa bean supplies simultaneously.

Matching selling prices with bean costs via hedging insulates it against fluctuating cocoa prices, thus locking in margins and earnings up front. We project two-year net profit to expand at 16.3% compound annual growth rate to RM135.3 million in FY12F.

Our fair value is pegged to 10 times target price-earnings ratio, using fully diluted FY12F earnings per share. This is a steep discount to DBSV's 15 times FY11/12 PER accorded to Singapore-listed Petra Food, its nearest peer.

GC is an under-researched counter. We like it because its market cap (RM941 million) is poised to expand along with strong profit growth. Potential risks to earnings are a global economic collapse (leading to customers deferring deliveries as demand falls) and disruptions to cocoa bean supply. ' HwangDBS Vickers Research, April 29


This article appeared in The Edge Financial Daily, May 3, 2011.