Guan Chong Bhd
(Feb 25, RM2.98)
Maintain buy with an unchanged target price (TP) of RM3.45: Guan Chong Bhd’s earnings of RM209.4 million for the financial year ended Dec 31, 2019 (FY19) were in line with expectations. A one sen final dividend was proposed. The stronger earnings were mainly attributed to higher sales volumes and earnings before interest, taxes, depreciation and amortisation (Ebitda) yields.

However, Guan Chong’s earnings for the fourth quarter ended Dec 31, 2019 (4QFY19) were lower mainly due to bonus payouts, a slight decline in margins and effects from a differential in deferred tax. We expect the Ebitda yield to remain healthy despite escalating cocoa bean prices.

The company’s FY19 core earnings of RM209.4 million or +17.8% year-on-year (y-o-y) were at 95% of our full-year forecast and within our expectations. Its higher revenue (30.1%) was attributed to elevated sales volumes, with a production tonnage of 245,700 tonnes versus FY18’s 201,600 tonnes.

The average Ebitda yield (Ebitda per tonne of production) was healthy at about RM1,354 against FY18’s RM1,301. A final dividend of one sen per share was proposed, bringing total dividends for FY19 to five sen versus FY18’s four sen.

The decline in 4QFY19 earnings to RM33.1 million, or 11.7% y-o-y and 49.3% quarter-on-quarter, was on higher bonus payouts and a slight decline in certain cocoa products’ margins from higher raw material costs. Not forgetting a RM16 million temporal tax differential related to an investment tax allowance for the Koko Budi plant expansion, resulting in a higher effective tax of 27.6% in 4QFY19 versus FY18’s 18.1%. Guan Chong’s profit before tax was 12% higher y-o-y.

This rise was due to dry conditions in West Africa from seasonal Harmattan winds and also traders’ supply hoarding, anticipating the living income differential implementation starting October. Guan Chong’s near-term margins could be affected if the company is unable to adjust pricing fast enough in tandem with a steep increase in terminal bean prices.

However, we believe the impact is neutral over the longer term, given pricing and active hedging mechanisms, with about 80% of FY20 sales locked in as of now. Notably, the combined ratio was flattish in 4QFY19 despite rising cocoa bean prices. All in, we expect Guan Chong’s Ebitda yield to remain healthy at about RM1,300 for FY20 on growing chocolate demand and a better operation efficiency.

Our earnings forecasts are unchanged. We had yet to impute German chocolate maker Schokinag Holding GmbH’s contribution into our forecasts, pending the acquisition’s completion in 1QFY20. Key risks are volatile cocoa bean prices, weak consumer sentiments and losing key management personnel.

We maintained our call and TP, based on 16 times FY20 forecast price-earnings (P/E). The stock remains an inexpensive proxy to the resilient consumer sector, trading at only 12.8 times P/E versus its local indirect peers’ 16 times to 17 times.

We believe Guan Chong is well-positioned to ride the growing demand for cocoa-based products, coupled with its earnings sustainability in the long term. The company’s new ventures in the Ivory Coast and Europe should be future earnings drivers. — RHB Research Institute, Feb 25