PETALING JAYA: Guan Chong Bhd is expected to see a stellar fourth quarter 2021 (Q4’21), in line with the recovery seen in global cocoa demand from performances of major grinders, according to RHB Research.
The research house said cocoa bean prices should remain relatively stable, with estimated bean surplus to carry over into 2021 and 2022, according to the International Cocoa Organisation.
“Besides, over 80% of the financial year ending Dec 31, 2022 (FY22) forward sales have been covered, with improved demand seen for its industrial chocolate in Germany – Guan Chong intends to add another 10,000 tonnes to its 90,000-tonne capacity, while its Ivory Coast plant’s readiness to contribute in second half 2022 (H2’22) all points to a better FY22,” said RHB Research.
The research unit noted that Guan Chong’s Q3’21 earnings of RM34.5mil (26.3% drop year-on-year) were weaker despite the higher top line of RM998mil (13.9% higher quarter-on-quarter, 18.6% higher year-on-year) – attributable to the significant RM26.1mil unrealised marked-to-market loss related to the hedging of cocoa beans as a result of the sudden surge in bean prices towards end Q3’21.
For consistency, RHB Research did not treat this as a non-recurring item, as the research house expects it to even out throughout a financial year or when hedging positions are closed.
Guan Chong has declared a second interim dividend per share of one sen (Q3’20: 1.5 sen).
Overall, the earnings before interest, taxes, depreciation and amortisation yield suffered at only RM878.80 per tonne (Q2’21: RM1,006.90) on lower forward sales ratio and major unrealised loss on a hedging position booked in Q3’21. Otherwise, RHB Research thought margins would have been much better and up trending.
“Overall lower margins seen – especially in H1’21 – were due to softer demand for cocoa butter products affected by the challenging operating environment amid the lingering Living Income Differential or LID and Covid-19 issues,” said the research unit.
RHB Research has maintained its “buy” call and RM4 target price based on an unchanged 18 times price-to-earnings (potential 45% upside and 2% FY22 estimated yield).
“We expect performance to further improve on stable input costs and pent-up global demand. The current below-peer valuation provides attractive entry to a global food and beverage supply chain player with significant earnings base and diverse multi-national corporation clientele,” said the research unit.
RHB Research also does not expect Guan Chong to incur extra tax payable in FY22 from Cukai Makmur (Prosperity Tax), as profits generated from its Malaysian subsidiaries are well below the RM100mil-mark.