PETALING JAYA: The demand for cocoa powder remains robust even during the coronavirus (Covid-19) pandemic due to its diversified usage and this is a positive factor for cocoa grinder Guan Chong Bhd.
RHB Research said this was due to the diversified usage of cocoa powder such as for baking, beverages and compound chocolate, among others.
While there has been some deferment of shipments, there has been no order cancellations to date and Guan Chong has locked in some 90% of its financial year 2020 (FY20) sales, with the remaining capacity facing some delays in take-up, given the softer demand and living income differential (LID) issue.
“Demand for premium chocolate in Europe is negatively affected by the pandemic, which, in turn, reduces the need for its main ingredient, cocoa butter.
“The premium segment that tends to hinge on tourist spending took a hit with the spread of Covid-19. However, this would be offset by the robust demand for cocoa powder, ” the research house said in a note yesterday.
The research house had previously highlighted that the forecast FY20 earnings before interest, tax, depreciation and amortisation (Ebitda) margin is likely to narrow due to higher overall raw material costs.
“However, the uptrend in the combined ratio would only partially compensate the LID premium charged on bean prices at the moment.
“To minimise the impact, the company has refrained from using the Ivory Coast and Ghana beans, wherever possible, ” it said, adding that the LID premium, while still uncertain, may eventually spread across the value chain, from the end-consumer to bean traders.
Guan Chong has posted its results for the first quarter ended March 31, which saw a 35.8% jump year-on-year (y-o-y) in net profit from RM53.14mil to RM72.17mil, while revenue rose 40.32% from RM648.07mil to RM909.38mil.
The results were within expectations of most research houses.
The group has also proposed a first interim dividend of one sen per share.
Guan Chong expects the lockdowns implemented worldwide to result in some delays in shipments to customers and a reduction in the utilisation of grinding capacity in the near future, but it is confident about its long-term prospects and uptrend in chocolate demand.
RHB also said the movement of cocoa bean prices has started to reflect the impact of the LID.
RHB has maintained its buy rating on Guan Chong with a target price of RM3.35, as demand for cocoa products is relatively less affected by the pandemic and Guan Chong is still running with minor disruptions during the movement control order (MCO) and conditional MCO.
It added that the group’s new venture into the Ivory Coast and Europe would be the next future earnings driver on top of a sustainable earnings base.
AmInvestment Bank Research has also retained a buy rating on Guan Chong, with a slightly lower fair value of RM3.20.
It has trimmed its earnings forecast by 2.4% for FY20 and 8.3% for FY21 to account for the delay in the Ivory Coast expansion plan from the first quarter of FY21 to the second-half of FY21, and the negative impact from the global lockdowns.
“We assume Ebitda yields of roughly RM1,290 for FY20 and RM1,380 for FY21 to FY22, ” the research house said.
It expects the group’s earnings to recover in the second-half of FY21, post containment of the Covid-19 pandemic, growing by 7% in FY21 and 26% in FY22.
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