Guan Chong (GCB) reported a disappointing set of results. Net profit shrank by 14.7% QoQ to RM57.2mil in 3QFY24. We maintain HOLD on GCB with a lower target price of RM3.33/share vs. RM3.57/share previously. Our target price is now based on a FY26F PE of 14x instead of FY25F originally. The group has extensive global reach with production facilities in Malaysia, Europe and Ivory Coast.

• Results were 13% below our forecast and 25% below consensus. GCB fell short of our forecast due to a lower-than- expected operating profit margin. We believe that GCB was affected by the volatility in cocoa prices. We have reduced our FY24E net profit for GCB by 10% to account for this.
• Net profit more than doubled to RM216.2mil in 9MFY24. This was driven mainly by higher selling prices as the group passed on some of the increase in the costs of cocoa. GCB's revenue surged by 99.2% to RM7.1bil in 9MFY24 from RM3.5bil in 9MFY23. EBIT margin widened to 6.2% in 9MFY24 from 5.6% in 9MFY23 underpinned by stronger selling prices.
• Earnings declined 14.7% QoQ to RM57.2mil in 3QFY24. Despite the strong yearly growth in 9MFY24, GCB's earnings declined for the second quarter in a row. We believe that GCB was affected by unrealised fair value losses on derivative forward contracts in 3QFY24.
• Cocoa prices are rising. Since reaching a low of US$3,733/tonne in January, cocoa prices have gone up to more than US$8,000/tonne due to supply disruptions in Ivory Coast and Ghana. The volatility in cocoa prices is expected to create challenges in GCB's hedging activities and selling prices.
• Demand may weaken. We believe that demand for chocolates would weaken going forward as consumers are deterred by high prices. In early-November, Hershey lowered its full-year financial outlook after reporting a slowdown in quarterly sales. Sales volume dropped as Hershey charged more for its products.

Source: AmInvest Research - 27 Nov 2024