• Stay BUY and MYR5.10 TP, 44% upside and c.2% yield. 2Q24F earnings should continue showing resilience, with a record-breaking year expected, backed by uptrending ASP, higher revenue and favourable hedging positions. We remain sanguine on Guan Chong’s outlook and earnings potential during this super cycle, bolstered by historic high ratios amid sustained cocoa demand, coupled with limited grinding and bean-on-offer. In our view, its Ivory Coast and UK capacity expansion would be the medium-term catalyst.

• On course for a record year. We expect 2Q24F earnings to remain robust, sustaining at the MYR80m-100m range, contrary to market expectations of a one-time strong profit in 1Q24 stemming from inventory/hedging gain. For 2H24, the higher ASP trend for its cocoa powder and cocoa butter should translate to a stronger HoH showing. We learnt FY24 capacity is well sold, with c.30% of FY25 capacity covered. Plant utilisation should be at an optimal level considering the sustained robust demand of cocoa ingredients except for some delay in the delivery of beans due to the ongoing port congestion issue. A majority of GUAN’s exports are on FOB terms, and we do not expect the higher freight to significantly put pressure on its ASP amid the supply shortage situation.

• The sustaining historic high combined ratio (butter ratio: >3x, powder ratio: >0.7x) since March (due to the ongoing supply crunch) is expected to result in much stronger earnings of 6-9 months given the forward selling mechanism. This will likely propel GUAN’s net profit to another new high in FY25F should more forward sales take place at an elevated ratio. Cocoa bean price is expected to moderate but remain elevated in 2H24 and 1H25 at USD5.9k to USD8.5k per tonne on sustained demand, based on Bloomberg estimates. Beyond the current supply crunch, there could be a structural change in the cocoa industry, in that the combined ratio may stay elevated even if bean supply was to improve. This is due to the new normal of the operating environment of heightened risk premium, additional hedging and holding costs that grinders have to undertake given the new-found volatility.

• Growth via expansion. In addition, GUAN has added 5,000 tonnes in capacity at its Ivory Coast plant. It is also looking to increase capacity by 20,000 tonnes in Asia by 2H24, bringing the total grinding capacity to 355k tonne pa. In the UK, management is looking at an additional industrial chocolate capacity of 6,000 tonnes (to be installed in 2H24), bringing the total capacity to 22,000 tonnes, alongside liquor and butter-melting facilities. Total capex planned for these extra facilities are estimated to be at c.MYR120m.

• Forecasts. We keep our forecasts and MYR5.10 TP, pegged to an unchanged 15x FY24F P/E (5-year mean) – on par with the Consumer Product Index. Our TP includes a 0% ESG premium/discount. Key downside risks include sharp raw material price fluctuations, weakening cocoa demand, a softening USD/MYR rate and counterparty risks.

Source: RHB Research - 15 Aug 2024