Guan Chong’s earnings recovery underway, AmInvest says


GUAN Chong Bhd’s (GCB) overseas expansion plan prospect gives the company an opportunity to tap into the European market, which has the biggest chocolate consumption, AmInvestment Bank Bhd (AmInvest) said in a report recently. 

The report stated the GCB’s international expansion plans are progressing well. 

Its beans grinding facility in Ivory Coast is on track for a first-half 2022 (1H22) commissioning. 

“With a 60,000 metric tonne (MT) capacity in this first phase, the facility is expected to contribute an additional RM70 million to the company’s Ebitda, per annum. 

“The initial phase’s capacity will be mainly taken up by its German plant, Schokinag Holdings, hence we foresee no issue in ramping up production in the immediate term,” AmInvest said. 

The research bank further asses that GCB is spending an additional €10.5 million (RM50.09 million) capital expenditure in Germany in 1H22 to increase the plant’s industrial chocolate production capacity by 10,000 MT per annum (current capacity: 90,000 MT per annum) and purchase machineries to resolve the bottleneck at it’s the production line currently. 

“Key risks for the company are slower-than-expected recovery of the tourism industry, high volatility of cocoa bean price and logistics cost to remain elevated pose downside risk to our earnings and fair value,” AmInvest said. 

The stock is trading at an undemanding valuation of 12.3 times price-to-earnings ratio (PER) 2022F earnings per share (EPS) compared to the Bursa Malaysia Consumer Product Index’s historical average of 19 times PER. 

The company’s 2022F strong earnings growth will be underpinned by normalisation of Ebitda yield, recovering demand for cocoa butter and maiden earnings contribution from the Ivory Coast plant. 

“We reiterate ‘Buy’ on GCB with a revised fair value of RM3.40 (from RM3.12), based on unchanged PER of 15 times 2022F EPS. We raise 2021F–23F earnings by 16%, 3% and 1%, respectively, for housekeeping purposes. There is no environmental, social and governance-related price adjustment for our 3-star rating,” the investment bank said. 

The bank also expects GCB’s Ebitda yield to gradually improve now that the industry has better clarity over the impact of the living income differential (LID) to cocoa bean price. 

Dipping below RM1,100 per MT level, the company’s 2021 Ebitda yield was negatively affected by the lack of clarity of the LID impact as GCB had locked its sales at an unfavourable ratio prior to the policy’s implementation.

“Following the LID implementation, the Ivory Coast and Ghana governments have been reducing the differential of their cocoa beans due to sluggish demand and this has neutralised the impact of the US$400 (RM1,672) per MT LID premium to chocolate makers and cocoa bean grinders,” the investment bank added. 

The recovering demand for upmarket chocolates is also expected to boost cocoa butter average selling price (ASP). 

In tandem with the recovering tourism and hotel industries, we expect demand for the luxury segment chocolate to gradually pick up its pace and this should augur well for cocoa butter’s ASP, 

Recall that the company saw its cocoa butter ratio declining in 2021 as sales of tourism-dependent premium chocolate was disrupted by border closures and lock-downs,” the investment bank added.