• Maintain BUY and MYR5.10 TP (79% upside), c.3% yield. Guan Chong has entered an MoU with Ivory Coast's Conseil du Café-Cacao (CCC) to acquire a 25% stake in Transcao Coté d’Ivoire (CI), which is involved in cocoa processing, manufacturing, and distribution. We are positive on the mutually beneficial venture, which gives GUAN quick access to additional capacity at minimal capex, helping it secure bean supply to capture the current robust market, while CCC stands to benefit from production efficiency and GUAN’s established international sales channel.

• CCC or Ivory Coast’s Coffee and Cocoa Council is the government body responsible for the regulation and development of the cocoa and coffee sectors. It oversees Ivory Coast’s annual cocoa bean production of c.2m MT (c.40% of global bean supply). GUAN’s subsidiary Transcao Negoce is a shareholder of CI, which operates a total capacity of 30k MT. Based on media reports, CI’s ongoing expansion in San Pedro and Abidjan could reach 250k MT by 2025 .

• The deal gives GUAN quick access to additional grinding capacity (currently 335k MT) at minimal capex to capture more sales and market share amidst the current favourable market conditions, with a synergistic partnership. An established partnership with the local authority would also help it secure the highly sought-after high-quality beans from Ivory Coast, especially EU Deforestation Regulation (EUDR)-compliant beans. The EUDR comes into effect on 30 Dec 2024 (with a potential 12-month phasing-in period).

• Potential impact to earnings. Information remains scarce at the moment as the final agreement has yet to be ironed out. This venture is expected to be earnings accretive in FY25 given the minimal additional resources required as GUAN’s operations in Ivory Coast are in close proximity. Investment quantum is likely to be below the 5% percentage ratio threshold.

• Current robust cocoa market conditions are anticipated to continue, in view of the ongoing supply shortage and sustained strong demand, resulting in the prolonged elevated combined ratio. We believe these will catalyse GUAN’s earnings growth at least in the next year, given the forward selling mechanism. Furthermore, there could be a structural change that may extend the elevated combined ratio. This is due to the new normal in the operating environment of supply shortage, additional hedging and holding costs, as well as the heightened risk premium (volatility) that grinders have to undertake. Further upside could stem from production growth in its Ivory Coast (tax- free) and UK plants, as well as the new proposed JV with CCC.

• Maintain forecasts and MYR5.10 TP, pegged to an unchanged 15x P/E (5- year mean) on par with the Consumer Product Index, and inclusive of a 0% ESG premium/discount. Risks: Sharp raw material price fluctuations, weaker cocoa demand, a softening USD/MYR rate, and counterparty risks.

Source: RHB Research - 10 Oct 2024