Cocoaland Holdings Bhd
(Feb 14, RM 1.90)
Maintain buy with a lower target price (TP) of RM2.70 per share: Keep “buy” with a new TP of RM2.70 from RM3.10, and about 47% expected total returns. For its fourth quarter ended Dec 31 of financial year 2019 (4QFY19) earnings are expected to be seasonally stronger in view of the festive holidays. However, its 1QFY20 sales are likely to be affected by the Covid-19 outbreak, given Cocoaland’s presence in China, Singapore, and Hong Kong. The quantum of the impact cannot yet be quantified. Notwithstanding, we believe growth prospects and fundamentals will remain intact beyond the virus outbreak concerns, riding on the robust demand for gummy products.

We estimate 4QFY19 earnings to be RM11-RM12 million, (+22% year-on-year [y-o-y], +68% quarter-on-quarter), bolstered by higher sales on seasonality and favourable raw material costs. However, we think the Covid-19 virus impacting Asia will pose a downside risk to 1QFY20 earnings. China, Hong Kong, and Singapore collectively contribute about 28% of Cocoaland’s total sales. The quantum of the impact should depend on the duration of the outbreak.

Cocoaland’s plan to expand its capacity has been delayed, as the construction of its new factory is taking longer than expected. The plant is now scheduled to run in April/May versus initial expectations of March/April. Hence, the group will not be able to capitalise on the surge in demand during the Aidilfitri celebrations at end-May.

We trim our forecasted FY20-FY21 earnings by 3% after imputing a more conservative sales assumption. This is to reflect the virus outbreak and delays in the commissioning of its new plant. Key risks to our call and earnings forecasts: a sharp rise in raw material costs, the stronger ringgit against the greenback, and further delays in the commissioning of new production lines.

We maintain our call with a new TP, which is based on a lower target price-earning ratio (PER) of 16 times from 18 times. We opt to be more conservative with our valuation, as we observe the delivery of steady earnings growth (nine months of FY19: +13%) has failed to excite the market or lift trading volumes. Additionally, sentiment on the stock could further be dampened, given the potential earnings downside from the Covid-19 outbreak and expansion plan delays. Notwithstanding, we believe its growth prospects and fundamentals will remain intact beyond the viral outbreak concerns. The stock is trading at a compelling 11 times PER, below the 16-18 times valuation range of comparable peers like Power Root Bhd (Buy, TP: RM2.80) and Apollo Food Holdings Bhd (Neutral, TP: RM3.40). It also offers a decent 5.3% yield. — RHB Research Institute, Feb 14