Guan Chong’s quarter one 2023 earnings were below expectations, dragged by huge unrealised losses on commodity futures, and higher-than-expected cocoa bean and interest costs.
Nonetheless, RHB Research (RHB) anticipates stronger year-on-year numbers this year from the maiden contribution from its overseas expansion, uptrending ratios, and the turnaround in Schokinag.
“Its valuation remains undemanding, given its unique exposure to the global consumer footprint, and its decent growth prospects,” said RHB in the recent Malaysia Results Review.
Quarter one 2023 revenue and core earnings of RM1.1 billion and RM23.8 million were at 9% and 10% of RHB and consensus’ full-year estimates, no thanks to the RM44 million unrealised losses on commodity futures and margin compression amid the sharp surge in cocoa bean prices in quarter one 2023, coupled with higher interest expenses.
“Note that we did not exclude the unrealised losses on commodity futures in arriving at our core profit for consistency, as it is part of the ongoing hedging process and will be compensated by higher revenue or reversed in the coming quarters,” said RHB.
The slower year-on-year earnings were compounded by the unfavourable forward selling prices locked in, and the effect of higher interest costs, which jumped 2.5x year-on-year to RM26.5 million.
While quarter one 2023 production tonnage was good at 71k tonnes, earnings before interest, tax, depreciation and amortisation yield slumped to a new low of RM776 per tonne from RM997 per tonne in quarter four 2022 and quarter one 2022’s RM1,367 per tonne due to higher cocoa bean costs, huge unrealised hedging losses, and additional costs from overseas expansions.
The Ivory Coast plant is expected to start contributing gradually from quarter two 2023, with a 5-year tax free status, while lower energy costs and higher average selling prices should swing Schokinag’s operations back into the black.
In the UK, a 16k-tonne annual capacity of industrial chocolate will be commissioned by mid-2023 and start contributing in the second half 2023.
“However, we note that the steep uptrend of cocoa bean prices may pressure the forward selling butter ratio and affect future margins if global chocolate demand does not pick up in tandem,” said RHB.
RHB tweaked financial year 2023 future-2025 future earnings by -8.9%, -6.1%, and – 4.6% after factoring in higher debt and interest expenses.
“Our trading price is lowered to RM3.30, pegged to an unchanged 17x financial year 2023 future price-earnings ratio, and on par with the Consumer Product Index,” said CGSCIMB.
CGSCIMB states that the trading price includes a 0% ESG premium/discount, as GUAN’s 3.0 score is in line with the country median.
Downside risks identified are the sharp raw material price fluctuations, weakening cocoa demand, and execution risks on its expansion plans.
