Guan Chong to continue positive growth against Covid-19 pandemic — RHB Research

TheEdge Mon, Aug 10, 2020 10:52am - 3 years View Original


KUALA LUMPUR (Aug 10): RHB Research has reiterated its "buy" call for Guan Chong Bhd (GCB) with a higher target price (TP) of RM4.30, from RM3.35 previously, based on 19 times price-earnings ratio (PER) for financial year ending Dec 31, 2021 forecast (FY21F) earnings, on a par with the Consumer Price Index (CPI) valuation.

This is justified given GCB’s resilient earnings base and liquidity-driven market sentiment, according to RHB Research analysts Lee Meng Horng and Muhammad Afif Zulkaplly in a note today.

“We expect it to continue to register positive growth despite the pandemic affecting the global economy. Demand for cocoa products remains healthy as consumers turn to comfort food during this period. Ivory Coast and Europe ventures should be the next earnings rerating catalyst.

“Further expansion and M&A (mergers and acquisitions) could be the other potential catalysts as the company makes inroads into Europe and the downstream [segment]. With the view of the pandemic posing minimal impact on its earnings, we increase our FY20F-22F earnings by 10%,” the analysts said.

They expect the company's second quarter ended June 30, 2020 (2QFY20) earnings to remain robust and be sustained at RM68 million to RM72 million despite the implementation of the movement control order (MCO), thanks to forward sales and a relatively stable combined ratio.

“While the MCO affected many other manufacturers’ supply and demand dynamics, GCB managed to maintain its utilisation rate at an optimal level of 95% and demand for mass-market chocolate remained healthy as the stay-at-home theme played out globally.

“We expect production to improve further sequentially in 2H20 (the second half of 2020) as the market heads for normalisation,” said the analysts.

They noted that other consumer stocks that offer relatively stable earnings during this challenging time continue to trade at premium valuations.

“For instance, Nestle (Malaysia) Bhd ('neutral'; TP: RM128) and QL Resources Bhd (‘neutral’; TP: RM8.16) are trading at 47.7 times and 53.3 times PERs respectively versus the CPI at 19.4 times PER.

“We believe Guan Chong shares similar stable earnings attributes, thanks to its diverse clientele. In spite of that, the company is trading at only 13.4 times PER, a huge discount to its customers, international peers and even the CPI. The company has recorded a five-year run in earnings growth and we expect it to maintain this impressive track record in FY20,” the analysts said.

However, they mentioned that key risks to their "buy" call include cocoa bean price volatility and prolonged uncertainty over the living income differential issue.

At 9.52am, shares in GCB were down two sen or 0.6% at RM3.33, valuing the group at RM3.44 billion, with 551,200 shares traded.

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