• Still BUY, new MYR3 TP from MYR3.11, 49% upside, c.3% FY24F yield. 9M23 MYR85.8m earnings (-33% YoY) missed expectations, dragged by losses on derivatives and margin compression amid surging cocoa bean prices and holding costs. While stubbornly high cocoa bean price remains the short-term headwind, demand for chocolate is still resilient. The current share price level provides a good entry level, given GUAN’s global consumer footprint, and position for the potential peaking of cocoa bean price as well as to reap the benefit from GUAN’s various overseas expansions.

• Below expectations. 9M23’s MYR3.5bn revenue (+7.9% YoY) led to the underperformance in the core earnings (MYR85.8m), at only 50% and 55% of ours and consensus’ full-year estimates, mainly due to lower-thanexpected margin from the lag in passing on the surging material price – further compounded by hedging losses and higher interest costs. However, Schokinag’s operation reported stellar numbers with a 7.8x growth in the EBITDA level to MYR70.2m thanks to higher ASP and lower utility costs. Declared a first interim dividend of 2 sen per share, going-ex on 26 Dec.

• Better sequentially. 3Q23 core earnings of MYR33.9m grew 10.1% YoY and 20.4% QoQ on margin recovery from its industrial chocolate operations, although this was partially offset by higher interest costs (+152% YoY). EBITDA yield improved to MYR923/tonne, from MYR873/tonne in 2Q23, but was still lower than 3Q22 of MYR1,028/tonne) due to lower combined ratio, higher cocoa bean costs, and marked-to-market hedging losses.

• Profitability dragged by high cocoa bean price. Despite better forward selling prices for cocoa butter in 2H, high cocoa bean prices – due to tight bean supply – led to additional working capital requirements and hedging cost. The lag effect and inability to pass on surging costs in the spot market for cocoa solids continued to pressure short-term margins. However, with cocoa bean prices potentially peaking and stabilising upon reaching supplydemand equilibrium, the tide may turn for GUAN, and it should benefit from lower input prices and margin expansion. Headline numbers may be further boosted by the derivatives gains.

• A better FY24. 70k metric tonne from the Ivory Coast plant (5-year tax free status) set to contribution fully. Coming off a potential record FY23, Schokinag should sustain the strong performance on lower input costs and higher ASPs. Its 16k-tonne capacity of industrial chocolate in the UK is also set start contribute in FY24 as part of diversification strategy by the group.

• We cut FY23F-25F earnings by -26.6 to -3%, after factoring in higher bean prices, lower margins, and higher holding costs from the additional working capital requirements. Our TP drops to MYR3.00 TP (includes 0% ESG premium/discount), pegged to an unchanged 15x FY24F P/E (5-year mean), and on par with the Consumer Product Index. Risks: Sharp raw material price fluctuations, weakening cocoa demand, and risks on expansion plans.

Source: RHB Securities Research - 28 Nov 2023