PETALING JAYA: Guan Chong Bhd’s production should improve further in the second half of this year as its operations normalise and demand for mass market chocolate remains robust.
RHB Research believes that the company’s second quarter earnings will be sustained at RM68mil-RM72mil 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, Guan Chong managed to maintain its utilisation rate at an optimal level of 95% and demand for mass market chocolate remains healthy as the stay-at-home theme plays out globally.
Its de-commoditising of cocoa powder is also serving Guan Chong well during this challenging time, as it was able to offset any weakness in the sale of cocoa butter, which relies on the premium chocolate market.
It believes the company’s resilient earnings base in the current environment of sustained industry demand deserves a re-rating, aside from multiple growth catalysts.
The company has increased its financial year (FY) 2020-2022 earnings by 10% as it believes the pandemic was posing minimal impact to earnings.
It also kept its “buy’’ call on Guan Chong with a new target price (TP) of RM4.30 a share from RM3.35 a share, which is a 28% upside.
This is based on a 19x price earnings ratio (PE) of revised financial year (FY) 2021 earnings, on par with consumer price index (CPI) valuation.
The research house feels the rise was justified given Guan Chong’s resilient earnings base and liquidity-driven market sentiment.
It said other consumer stocks that offer relatively stable earnings during this challenging time continue to trade at premium valuation.
For instance, Nestle Malaysia (target price: RM128.00) and QL Resources (target price:RM8.16) are trading at 47.7x and 53.3x PE versus the CPI of 19.4x PE.
“We believe Guan Chong shares similar stable earnings attributes, thanks to its diverse clientele, ’’ it added.
The brokerage adds that the Ivory Coast and Europe ventures should be the next earnings re-rating catalyst.
Further expansion and mergers & acquisitions could be the other potential catalysts as the company makes inroads into Europe and downstream.
However, it said the key risks to its call include cocoa bean price volatility and prolonged uncertainties over the living income differential issue.
Shares of Guan Chong closed at RM3.31yesterday, valuing the company at RM3.39bil.
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