Investment Highlights

• We maintain HOLD call on Guan Chong with an unchanged fair value of RM2.29/share, pegged to FY24F P/E of 16x – at 1 std dev below its 5-year mean of 18x. This also reflects an unchanged neutral ESG rating of 3-star.

• Our earnings forecasts are maintained following an analyst briefing yesterday. These are the key takeaways:
  • To recap, the company’s 3QFY23 EBITDA yield improved to RM923/MT (+5.7% QoQ) due to better operational efficiencies on grinding margin despite flattish production tonnage.
  • Cocoa prices continue to increase to the average of USD3,368/MT (+8% QoQ) in 3QFY23 due to a lower bean yield. Lower bean yield was impacted by bad weather conditions, swollen shoot virus and fertiliser shortages in West Africa. We expect cocoa prices to continue rising amid tight supply caused by poor harvesting. Currently, cocoa future prices continue to trend upwards to USD4,260/MT, an increase of 75% YoY. 
  • The group highlighted that its industrial chocolate plants in Germany have a utilisation rate of 78% with a higher production capacity of 100k MT per year. Moving forward, the company will continue to see better revenue and EBITDA contribution on easing energy prices and bettermargin industrial chocolate sales.
  • Meanwhile, its new industrial chocolate plant in Suffolk, UK is on a trial run production at low utilisation rates for audit qualification. Management guided that this is likely to see marginal contribution in 2HFY24 when production starts.
  • We understand that the average selling price for cocoa powder increased 8% QoQ in 3QFY23 while the cocoa butter ratio also improved slightly QoQ. Thus, we expect the combination ratio of cocoa butter and cocoa powder will continue to increase, resulting in higher average selling prices for cocoa products. We also understand customers are accepting higher average selling prices in tandem with cocoa bean price trends.
• Moving forward, we continue to be cautious on the group’s near-term outlook on the back of:
  (i) rising cocoa prices due to poor bean production yield, and
  (ii) shipment deferments due to customer concerns on high cocoa prices.

• The group currently trades at a fair FY24F PE of 14x vs. its 5-year average of 15x amid elevated raw material costs, while offering low dividend yields of 2%.

Source: AmInvest Research - 29 Nov 2023