RHB Research has reiterated its optimism on a much better Guan Chong’s forecast earnings of 2023 (FY23F) with full contribution from Ivory Coast, uptrending ASP on sustained robust demand globally and stronger numbers from Schokinag operations on lower energy costs and bigger capacity.
In its research report, it has also emphasized on the fact that Guan Chong’s current valuation is very attractive as Asia’s largest cocoa grinder with a diverse global clientele.
Below expectations. 9M22 revenue and core earnings of MYR3.29bn (+16.0% YoY) and MYR128.6m make up 61% and 60% of the street’s full-year estimates. The results fell short of expectations as 3Q22 core earnings of MYR30.8m (-10.7% YoY and -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 uprising interest rate environment. YTD EBITDA margin improved with higher cocoa powder ratio and cheaper cocoa bean prices cushioning the lower cocoa butter ratio and higher freight cost.
EBITDA yield. 9M22 EBITDA yield recovered to an average of MYR1,235/tonne (9M21: MYR1,080/tonne) but 3Q22 EBITDA yield contracted to MYR1,028/tonne (3Q21: MYR1,130/tonne) due to the lower butter ratio and the huge unrealised FX loss. More than 60% of the overall capacity (including Ivory Coast) in FY23F has been sold with an uptick in butter ratio while the cocoa powder ratio continues to be on an uptrend amid lower inventory levels in Asia, normalised freight costs, and sustained demand across the market for chocolate products.
Finally, Ivory Coast plant is set to contribute. The Ivory Coast plant has finally commenced operations and is slated to ramp up to optimal capacity by December, with expectation of full contribution come FY23F. In addition, the declining trend of energy costs and higher ASP are expected to drive better profitability for its Schokinag operations in Germany moving forward along with the capacity expansion for industrial chocolate.
Despite the weakness in 3Q, the research house remains positive on the performance of Guan Chong in 4Q given the better outlook and potential earnings breakout with contribution from Ivory Coast’s 60k tonne of output in 2023. It has trimmed its FY22F earnings by 14.8% but keep its FY23F-24F earnings relatively unchanged after factoring in higher interest expenses and lower contribution from Schokinag.
RHB Research has also maintained BUY rating on this counter as its target price (TP) is now lowered to MYR4.00 after removing cash proceeds following the expiry of the warrant, pegged to 17x FY23F P/E, or +1SD from its 5-year mean, and on par with the Consumer Product Index. It has baked in its TP with a 0% ESG premium/discount, as this company’s 3.0 score is in line with the country median.
Downside risks identified include sharp raw material price fluctuations, weakening cocoa demand, and execution risks on expansion.
