Investment Highlights

• We reiterate our BUY call on Guan Chong with a same fair value (FV) of RM3.15/share, based on FY23F PE of 15x – 2.0 standard deviation from its 5-year mean of 11.7x on higher grinding capacity from its new plant in Ivory Coast, with no changes to our neutral ESG rating of 3 stars.

• We tweaked our FY22F earnings lower by 4% but maintain FY23F and FY24F, following an analyst briefing last Friday. Key takeaways included:
  • Guan Chong’s Ivory Coast new plant was commissioned just weeks ago and the group is looking forward to be fully operational in the last quarter of 2022. We expect the plant, which will add an extra 60,000 MT per annum of grinding capacity to group level. Assuming full plant utilisation rates, this could contribute 18%- 19% of FY23F group EBITDA.
  • Facility upgrades of Schokinag plant in Germany are poised to complete by 4QFY22, bringing its industrial chocolate production capacity by another 10,000 MT per annum starting 2023 which will add 1%-2% of FY23F group EBITDA. Schokinag’s 3QFY22 revenue grew 8% QoQ and 5% YoY due to higher average selling prices of cocoa powder and sales volume (+5.1% QoQ and +3.8% YoY). However, the plant’s EBITDA dipped to losses in 3QFY22, mainly squeezed by higher energy cost in the Europe.
  • Management guided that the region’s energy prices are declining in 4Q2022, especially in Germany. However, our check on Germany’s official data showed that producer price index in October still increased by 35% YoY. We have already factored in higher operating cost for Schokinag. Our cost assumptions are maintained for FY23F and FY24F as Germany’s government will implement a price cap on energy prices starting January 2023.
  • We also note that orders from major confectionery brands are still strong as chocolate demand remains encouraging, notwithstanding lingering geopolitical tensions.
  • 60% of the group's forward sales of cocoa ingredients for FY23F was sold with powder ratio expected to continue on an uptrend, despite butter ratio remaining flattish currently.
• All in, the group maintains its FY23F target EBITDA yield of RM1,200/MT, although 3QFY22 EBITDA yield declined 10% YoY to RM1,028/MT. We believe that this is achievable as 9MFY22 EBITDA yield stood at an average of RM1,235/MT vs. RM1,080/MT in 9MFY21.

• The group currently trades at an attractive FY23F PE of 10.8x as compared to its 5-year peaks of over 13x.

Source: AmInvest Research - 29 Nov 2022