• Maintain BUY and MYR3 TP, 52% upside, c.3% FY24F yield. Post results briefing, we maintain our contrarian call on resilient cocoa demand, the uptrending ratio, and improving utilisation rates as well as sales volumes. This is despite short-term margin compression, dragged by derivatives losses and additional holding and hedging costs amid elevated cocoa bean prices, which may reverse once prices stabilise. Guan Chong should benefit from its growing global presence to capture long-term consumption growth, and the potential normalisation of bean prices in FY24.

• Earnings recap. 9M23 earnings of MYR85.8m (-33% YoY) missed expectations mainly due to lower-than-expected margins on the back of surging material prices – further compounded by hedging losses and higher interest costs. This is despite record high revenue of MYR3.5bn (+7.9% YoY) on better ASPs and favourable FX despite lower sales volumes. Notably, Schokinag’s operations saw a dramatic improvement with 7.8x growth at the EBITDA level to MYR70.2m, thanks to higher ASPs and lower utility costs. The sequential improvement in 3Q23 was aided by strong performance from the industrial chocolate operations, which offset higher interest costs.

• Net gearing surged to 1.18x (FY22: 0.71x) on extra working capital requirements due to the high cocoa bean prices, as well as hedging and holding costs from additional capacity at the Ivory Coast plant. Management guided that net gearing should improve significantly upon normalisation of cocoa bean prices and ongoing inventory management efforts. 9M23 utilisation rate was at 87% (9M22: 97%) due to scheduled maintenance works and the ramping up of the Ivory Coast plant. Delays in price fixing and off-take by customers caused the YoY contraction in sales tonnage despite higher production tonnage.

• Resilient demand despite historic high price. Management noted that utilisation and sales tonnage should improve in 4Q23 with more deliveries spurred by strong demand from clients. GUAN has also been receiving urgent purchase requests from its clients due to a supply disruption at a major cocoa grinder in the region since September. 1H24 capacity is well oversold, while >50% of 2H24’s forward selling is covered at a higher ratio, thanks to overall sustained demand.

• Expansion updates. Having generated MYR34m 9M23 EBITDA, the Ivory Coast plant (5-year tax free status) is set to grow with full-year contribution in FY24, while the Schokinag 100k-tonne industrial production should sustain its strong performance, albeit at a normalised c.5% EBITDA margin. The 16k-tonne capacity of industrial chocolate in the UK is undergoing audit. Trial runs should start in early FY24, with bottomline contribution in 2H24.

• Maintain forecasts and TP (includes 0% ESG premium/discount), pegged to 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 - 29 Nov 2023