Sweet taste of success for Guan Chong


  • Corporate News Premium
  • Saturday, 30 Nov 2019

Guan Chong Bhd chief executive officer Brandon Tay Hoe Lian posing with some cocoa products.

RIDING high on the world’s love for chocolates, GUAN CHONG BHD’s share price has shot up by over 94% in the past one year.

Now the world’s fourth largest cocoa grinder has gotten another shot in the arm.

On Nov 28, Guan Chong joined the Securities Commission’s newly-revised syariah-compliant stocks list.

A syariah-compliant status could likely pave the way for a further re-rating of the stock, according to RHB Research Institute earlier on Nov 19.

To date, the research firm has recommended a “buy” rating on Guan Chong with a target price of RM3.25 per share, 20% higher than its closing price of RM2.70 on Nov 29.

Guan Chong is also one of RHB Research Institute’s top 20 “small cap jewels” for 2019.

Backed by the ever-growing global demand for cocoa-related products, the enhanced operational efficiency and bigger production capacity, Guan Chong is confident of hitting a record-high net profit in the current financial year of 2019 (FY19).

It is worth noting that the company has achieved almost 92% of the net profit made in FY18, just in the first nine months of FY19.

The company’s 12-month trailing price-to-earnings (PE) ratio, according to Bloomberg data, remains undemanding at 10.82 times. In comparison, the median PE ratio for the Bursa Malaysia Consumer Products Index is 14.04 times.

Guan Chong is well positioned to enjoy the increasing cocoa-related products consumption by the global population.

Based on a recent independent market research by Grand View Research, the global cocoa beans market size is expected to grow by a compounded annual growth rate of 7.3% between 2019 and 2025.

In anticipation of the stronger global demand growth, Guan Chong is working towards ramping up its production capacity.

By 2021, the group’s total annual grinding capacity will increase to 310,000 tonnes across Malaysia, Indonesia and Africa - about 24% higher than its current capacity of 250,000 tonnes.

The additional 60,000 tonnes annual grinding capacity will come from Guan Chong’s new cocoa processing plant in Cote D’Ivoire, which is expected to commission in the first quarter of 2021.

The company has set aside an estimated capital expenditure of €50mil to €60mil for the new plant.

In an interview with StarBizWeek, Guan Chong managing director and chief executive officer Brandon Tay says that the company currently purchases cocoa beans for its plants in Asia from Cote D’Ivoire.

It is the world’s largest cocoa producing country.

“As a result, being situated in Cote D’Ivoire strengthens our global supply chain and ensures we have a stable source of high-quality cocoa beans.

“Furthermore, by processing the cocoa beans at source, we save significantly from logistics and taxation costs incurred in our current set-up where we ship cocoa beans to our plants in Indonesia and Malaysia.

“Besides the additional grinding capacity, Cote D’Ivoire grants us quicker access to Europe, the world’s largest market for chocolate consumption.

“Being located nearer to the region and sharing the same time zone would help us to expand our export sales there, ” he says.

Aside from Europe, Tay says Guan Chong is eyeing to venture into new markets in the fast-growing Asian region, which is experiencing rising affluence, by leveraging on its existing capacity.

The cocoa grinder is also increasing its cocoa product offerings.

“Specifically in the cocoa powder segment, we are increasing our range of customised cocoa powder, where we broaden our flavour range and colour profiles of our cocoa powder to offer new flavours in chocolate products, for instance black cocoa powder.

“Customers are always looking for the next new tastes, and our R&D techniques and expertise in this field would be a precursor to that, ” Tay says.

Currently, Guan Chong produces a full range of cocoa products, which mainly constitutes cocoa cocoa butter and cocoa powder. Cocoa butter is primarily for higher-end markets such as higher quality chocolates and cosmetic products, while cocoa powder is used for more general uses such as confectionery, snacks and beverages.

The company’s cocoa ingredients are marketed under the “Favorich” brand.

Tay was asked whether Guan Chong may acquire cocoa plantations to source its own raw material.

“We are not looking to go upstream, and would focus on our core expertise of cocoa processing and manufacturing of cocoa ingredients, ” he says.

Cost concernsThe rising global demand for cocoa-based products has also resulted in higher prices.

Global cocoa prices have largely been on an uptrend in 2019, especially since September. Based on the International Cocoa Organisation data, global cocoa prices have surged by over 16% in the past three months.

On Nov 13, the cocoa price level even breached US$2,600 per tonne - the highest since May 2018. As of Nov 27, the price stood at US$2,521.01 per tonne.

Tay described the impact of higher cocoa prices on the company’s operations as “minimal”.

“Our business model is based on a cost-pass-through basis.

“When cocoa bean prices are high, our selling price of cocoa ingredients, especially cocoa butter, would be high as well.

“The same is true vice versa, ” he says.

Guan Chong’s inventory turnover is typically about four months and has been stable for the past couple of years.

“Our inventory is largely our raw material of cocoa beans.

“Also, it is also important to note that inventory risk is minimal for us, as our business model involves selling forward to global buyers with delivery periods ranging from a couple of months up to a year, ” according to Tay.

A look at Guan Chong’s balance sheet indicates that the company is sitting on large net debt position of RM903.06mil as at Sept 30, with total cash and cash equivalents at RM31.86mil against total borrowings of RM934.92mil.

Nearly 91% of its RM934.9mil borrowings are denominated in US dollars.

Meanwhile, its latest net gearing ratio is 1.08 times.

In response to this, Tay says there is no cause for concern.

“More than 90% of our borrowings are used for working capital and are matched with raw materials, namely cocoa beans. This financing structure has historically been the norm for our business.The balance of our borrowings are used to finance our expansion plans.

“In any case, the group has newly listed warrants on the Main Market of Bursa Malaysia, which would contribute extra working capital of up to RM277.2mil and thus reduce our gearing, ” he adds.

On the impact of weaker ringgit on Guan Chong’s operations, Tay says it is minimal.

“Our material purchases, which comes from foreign markets, and sales of goods are transacted in foreign currencies. In essence, we have a natural hedge.

“The foreign currencies that we use are US dollars and pounds, ” he says.

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