AmInvestment retains Buy on Cocoaland

Products made by Cocoaland

KUALA LUMPUR: AmInvestment Research is retaining its Buy call on Cocoaland Holdings with a higher fair value of RM2.80 a share after revising upwards its earnings estimates. 

It said on Tuesday its fair value was based on an unchanged FY16F target PE of 18 times.

“Following our recent company visit, we raised Cocoaland’s FY15F and FY16F EPS forecasts by 10% and 7% to reflect the step-up in its margins from its ongoing move up the value chain and internal efficiency initiatives,” it said.

 AmInvestment said for 9MFY15, Cocoaland’s EBIT margin had expanded by 6.6 percentage points on-year to 16%. 

“The jump can be mainly attributed to the group’s better sales, favourable raw material prices as well as the US dollar rally. 

“While we foresee its EBIT margin ahead moderating slightly due to a stabilising ringgit, the 11% minimum wage hike effective July 2016 and potential price discounts, we do not expect it to revert to its last five years’ average of 10%,” it said. 

AmInvestment said underpinning Cocoaland’s upward earnings trajectory (three-year CAGR of 18%) is the increase in sales of its fruit gummy and hard candy, especially from its overseas markets. 

While Cocoaland’s domestic sales were not directly impacted by GST, the drag on its topline was due to lower overall volumes amid soft consumer sentiment and greater competition (especially in the beverage segment).

“In view of this, it intends to focus on its export markets, i.e. China, Indonesia and Vietnam. At present, export sales make up 55% of the group’s total revenue with 80% of that being denominated in US dollar. 

“Management had further clarified that only two-thirds of its revenue is affected by the exchange rate, as the prices and exchange rate of the remaining third have been fixed in the contracts (mainly original equipment manufacturers).

 “The stock is currently trading at undemanding FY15F-FY16F PEs of 14 times to 15 times (0.5 standard deviation below its five-year mean). Yields are also attractive (FY15F: 13% including a 20 sen special dividend; FY16F-FY17F: 4% per annum) given its debt-free position and absence of any major capex in the next two to three years,” it said.