• Keep BUY and MYR4.00 TP, 75% upside and c.4% FY23F yield. We came away from the post-results briefing feeling positive on the optimistic outlook in FY23F, supported by an uptrending combined ratio on sustained robust demand, additional production capacity, and profitability of Schokinag operations on lower energy costs and better operating efficiency. Current valuation of 8X FY23F P/E is very attractive for the world’s fourth largest cocoa grinder with a solid diverse clientele base.

• Earnings recap. 9M22 revenue of MYR3.29bn (+16.0% YoY) translated into core earnings of MYR128.6m (+22.8% YoY). 3Q22 core earnings of MYR30.8m (-10.7% YoY, -31.1% QoQ) were dragged down by huge unrealised FX loss of MYR17.1m due to the strengthening of the USD, loss- making in Schokinag operations amid high energy cost and higher interest expenses given the rising interest rate environment.

• Outlook. Management guided that more than 60% of the overall capacity (including Ivory Coast) in FY23F has been sold, with a slight uptick in butter ratio while the cocoa powder ratio continues to be on an uptrend. Management is monitoring closely its financing structure and minimising inventory level in view of the rising interest cost. The additional c.MYR88m proceeds from conversion of the remaining 53m outstanding Warrant B (expired on 4 Nov) on top of the YTD proceeds of MYR113.1m would help to boost its coffers and partially alleviate the escalating interest cost burden.

• Schokinag operations are expected to return to profitability in FY23F given the lower energy costs locked in plus the overall declining trend of energy costs in Germany. The forward selling of industrial chocolate at a higher ASP would also help to cushion the impact of escalating energy cost. Notably, encouraging signs from the record high production tonnage of 20.4k tonnes in 3Q22 and the additional 10k tonnes of capacity (ready by 4Q22) are expected to further boost the group’s topline and operational efficiency.

• Ivory Coast. Phase 1 of 60k tonnes of the Ivory Coast plant has commenced operations and is expected to ramp up to optimal capacity by December. We estimate the plant to generate MYR50-80m profit pa to the group once production is stabilised. Currently, various certification processes are ongoing, with the initial production expected to supply to its industrial chocolate arm in Schokinag. Note that its Ivory Coast operations are granted a 5-year tax free status and another 5 years at 50% tax-exempted status.

• United Kingdom. An annual capacity of 16k tonnes of industrial chocolate is expected to be commissioned by early 2023 for the plant at Suffolk, UK, it acquired two years ago. This expands the group’s total capacity and marks another milestone in its strategic plan to penetrate the European market.

• Our TP is unchanged at MYR4.00, pegged to 17x FY23F P/E (+1SD from its 5-year mean) – on par with the Consumer Product Index – includes a 0% ESG premium/discount, as the 3.0 score is in line with the country median. Downside risks: Sharp raw material price fluctuations, weakening cocoa demand, and execution risks on expansion.

Source: RHB Research - 29 Nov 2022