Guan Chong Bhd (May 18, RM3.08) Maintain buy at RM3.08 with target price of RM3.60: Guan Chong (GC) reported 1QFY11 net profit of RM30.1 million (+52.5% year-on-year) on the back of RM290 million revenue (+7.8%) which was driven by higher sales volume, better margins and lower effective tax rate. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin continued to inch up to 13.3% against FY10's 10.6% and our FY11F of 11.4%.
We attribute this to higher average selling prices and better economies of scale. Bottom line was also lifted by a lower effective tax rate (ETR) of 10.8% as the manufacturer of cocoa-based food ingredients utilised most of the outstanding export tax incentives (circa RM35 million as at end-2010) upfront in 1Q11.
We expect a rise in ETR (our full-year estimate is 19.3%) would be more than covered by increasing contributions from its new plant in Batam, Indonesia. GC has unveiled a dividend policy to pay out at least 25% of net profit (our FY11 assumption is 30%).
GC's new grinding facility in Batam, completed at end-February 2011 with a 60,000 tonne annual capacity, would contribute about 40% of quarterly sales volume from 2QFY11 onwards. As at 1QFY11, its Batam plant is already churning an operating profit of RM1.5 million despite barely one month of operation (excluding its indirect contribution to the Singapore marketing arm, which made an operating profit of RM4.4 million in 1Q).
We understand that GC's current running capacity of 140,000 tonnes (Pasir Gudang and Batam) is fully taken up, thus providing earnings visibility for FY11.
We reaffirm our 'buy' call. Our RM3.60 target price is pegged to 10 times fully diluted FY12F earnings per share. The stock has climbed 5% since our initiation report on April 29. We still like GC as an undervalued global manufacturer of cocoa ingredients as capacity boost (to 200,000 tonnes by mid-2012) and secured orders are expected to drive earnings momentum (two-year compound annual growth rate of 16%) ahead. ' HwangDBS Vickers Research, May 18
This article appeared in The Edge Financial Daily, May 19, 2011.
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guanchg-w(5102w) $2.00 above by 28-02-2012
2011-06-07 02:25