(Oct 15): MARC Ratings has maintained its AA-IS rating with a negative outlook on Guan Chong Bhd’s (KL:GCB) Islamic Medium-Term Notes (Sukuk Wakalah) Programme.

The agency said the negative outlook primarily reflects the continued high and volatile cocoa bean price environment that has led to a sizeable increase in GCB’s working capital requirements.

At end-September 2024, cocoa bean price reached USD7,722/MT considerably higher than the USD3,000/MT level prior to the price escalation in the fourth quarter of 2023.

GCB has RM600 million outstanding under the Sukuk Wakalah programme.

MARC said in a statement that GCB’s cocoa bean purchases at the prevailing bean prices have led to additional borrowings, which rose to RM3.4 billion in 1H2024 from RM2.2 billion in end-2023.

“The rapid increase in borrowings outpaced equity growth, leading to a gross debt-to-equity ratio of 1.79 times as at 1H2024, versus 1.24 times as at end-2023,” MARC said.

It also noted that as at end-June 2024, GCB’s operating cash flow remained negative, weighed down by working capital requirements.

MARC also said it will revise GCB’s outlook to stable if cocoa bean price abates to a normalised level and eases GCB’s borrowings.

As for the affirmation of the AA-IS rating, MARC explained that GCB’s established market position in the midstream cocoa supply chain — as the largest cocoa grinder in Asia and fourth in the world — and its longstanding operating track record are key rating drivers for the affirmation.

It also said the utilisation rate of GCB’s grinding capacity of 330,000 MT per annum stood at 97% as of June 2024, reflecting the continued strong demand for cocoa products despite the cocoa bean price increase.

“GCB continues to procure beans from other countries in West Africa to fulfil its supply contracts to minimise disruption to operations,” it noted.

It will continue to monitor the cocoa bean price environment and the impact on GCB over the next few months to take further appropriate rating action.

“Any outlook revision will mainly be premised on improvement in leverage and liquidity position.”

Shares in GCB closed two sen or 0.7% lower at RM2.85, giving it a market capitalisation of RM3.35 billion. Year-to-date, the stock is up 55.7%.