• Keep BUY and MYR4.15 TP, 69% upside, c.3% yield. Guan Chong’s 1H22 earnings met our expectations but missed consensus’, with its 39% YoY growth aided by higher sales tonnage as well as stronger margins from lower raw material costs and better economies of scale. We expect a similar performance in 2H, with potentially stronger numbers from its Schokinag operations on lower energy costs, sustained robust demand globally, and higher production capacity. Current valuation is attractive for Asia’s largest cocoa grinder, with its consistent earnings base and diverse clientele.

• Sustained earnings recovery. 1H22 revenue and core earnings of MYR2.19bn (+19.2% YoY) and MYR97.9m make up 46% of our full-year estimates but only 41% of Street’s. EBITDA margin inched higher YoY, with higher cocoa powder ratio and cheaper cocoa bean prices cushioning the lower cocoa butter ratio. 2Q22 revenue reached a new milestone of MYR1.2bn, helped by backlog fulfilment, higher sales tonnage, improving ASP for cocoa solids, and favourable FX rates, leading to 22.6% YoY earnings growth. A second interim DPS of 2 sen/share (2Q21: none) was declared (ex-date: 14 Sep).

• EBITDA yield uptrend. 1H22 EBITDA yield recovered to an average of MYR1,271.3/tonne (1H21: MYR967.4/tonne) thanks to better powder ratio, lower raw material prices, and economies of scale on higher production volumes. Management guided for a continued uptrend in cocoa powder ratio and an inflection point for cocoa butter ratio in the forward sales amid lower inventory levels in Asia, normalised freight costs, and stronger demand across the market for chocolate products – as evidenced in its secured forward sales activities of >95% and c.60% for FY22 and FY23.

• Update on expansion plans. We understand that Phase 1 of the 60k tonne pa Ivory Coast plant expansion is currently under commissioning, with first production expected in 4Q22 after several delays in its construction. In Germany, exorbitant energy costs are expected to inch lower in the subsequent quarters, driving profitability of the Schokinag operations. Capex of EUR10.5m for facility upgrades are expected to be completed by 4Q22, bringing the total capacity to 100k MT of industrial chocolate, to cater for strong orders from major confectionery brands. Meanwhile in the UK, GUAN has a planned capex of GBP31m to install advanced machinery for 16k MT of industrial chocolate production by 4Q22.

• BUY for potential earnings breakout in 2023, with unchanged MYR4.15 TP pegged to 17x P/E, at +1SD from the 5-year historical mean and on par with the Consumer Product Index. Our TP includes a 0% ESG premium/discount, as GUAN’s 3.0 score is in line with the country median. The stock is trading at undemanding 9x FY23F P/E as it is Asia’s largest cocoa grinder with a solid earnings base secured by its forward-selling mechanism and unique exposure to growing global demand for chocolate. Key downside risks: Sharp raw material price fluctuations, weakening cocoa demand, and execution risks on expansion.

Source: RHB Research - 17 Aug 2022