Guan Chong’s earnings to grow on UK expansion


COCOA processor Guan Chong Bhd’s future earnings growth is strongly underpinned by its overseas expansion, particularly in the UK, observes RHB Investment Bank Bhd (RHB Research).

Its analysts Lee Meng Horng and Muhammad Afif Zulkaplly in a note yesterday said although its expansion plan is still at a nascent stage, the future earnings potential looks bright.

“We look forward to its Ivory Coast and European ventures as the next earnings rerating catalysts,” they added.

They said the company has been benefitting from the need of big chocolate makers to diversify their sources of cocoa ingredients as part of their risk management initiatives.

Compared to its bigger competitors, Guan Chong’s products are more competitively priced which provides more reason for its customers to support its entry into the UK.

“Being a net importer of cocoa products, and given its huge market, we believe the UK is a perfect fit for the company’s next expansion phase,” the analysts said.

The biggest motivation behind Guan Chong’s venture into the new market is to diversify into another important market in Europe and support its key multinational corporation clients.

Guan Chong has recently entered into a sale and purchase agreement with Philips Electronics UK Ltd to acquire a freehold property, together with plants and machineries, at the Philips Avent Factory, Suffolk, for a total of £8.3 million (RM44.44 million), to manufacture cocoa butter and liquor melting.

During the first phase, the company plans to manufacture cocoa butter and liquor melting at the new plant.

It will require up to €5 million (RM24.29 million) additional capital expenditure (capex) to instal the line and is expected to contribute around £1 million to £5 million per annum, if running at the optimal utilisation rate.

The company is looking to instal a 60,000 metric tonnes per annum — 24% more of current capacity excluding Ivory Coast — cocoa grinding line in the next phase, which may require additional capex of around €40 million to €50 million.

RHB Research maintains its ’Buy’ call and RM4.30 target price for the counter, with no change to its earnings estimates.