Cocoaland sees better manufacturing performance

TheEdge Fri, May 24, 2019 09:57am - 4 years View Original


Cocoaland Holdings Bhd
(May 23, RM1.96)
Maintain buy with an unchanged target price (TP) of RM2.70:
Cocoaland’s first quarter of financial year 2019 (1QFY19) earnings were within expectations, down mainly on higher marketing expenses. However, demand for its gummy and hard candy products stayed resilient. Cost optimisation initiatives saw some results: lower employee costs. We continue to like the stock, given its sustainable earnings on robust gummy products demand, supported by a proven track record and strong brand equity.

 
Cocoaland’s 1QFY19 results were within our and consensus expectations, with earnings of RM8.4 million (-1.8% year-on-year [y-o-y], -12.6% quarter-on-quarter [q-o-q]) that accounted for 25% and 27% of full-year forecasts respectively. The lower earnings were mainly attributed to higher marketing expenses and decreased other income, netting off increased revenue of RM65.6 million (+1.9% y-o-y, +7% q-o-q). No dividend was declared.

The manufacturing segment’s performance improved, reporting 1QFY19 pre-tax profit of RM4 million (1QFY18: RM83,000 pre-tax loss), thanks to a better product mix and lower employee costs. However, Cocoaland continued to feel the impact of sluggish demand for beverage products, dragging revenue down 9.2% y-o-y (-0.02% q-o-q) to RM16.9 million, offsetting growing demand for gummy and hard candy products.

The trading unit registered a higher revenue of RM48.7 million (+6.3% y-o-y, +9.7% q-o-q), as demand for gummy, snacks, and coco-pie products grew. However, higher marketing expenses from exhibition and promotional activities dragged pre-tax profit down to RM6.5 million (-52.7% y-o-y, +5.3% q-o-q). We also note that this unit’s pre-tax profit margin dropped 12 percentage points when compared to 1QFY18’s numbers.

Downside risks to our recommendation and earnings forecasts include sharp rises in raw material costs and weaker consumer sentiment. A strengthening of the ringgit against the US dollar should also negatively affect Cocoaland’s earnings. We make no changes to our forecasts. — RHB Research, May 23

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