• Keep BUY, new MYR6.22 TP from MYR5.10, 121% upside and c.2% yield. 9M24’s record high core earnings of MYR242m (+183%) was a slight miss; mainly on higher-than-expected interest costs. We remain upbeat on Guan Chong’s stellar earnings outlook from 4Q onwards, supported by forward sales at favourable ratios and normalised production volumes. Current P/E valuation of 6-7x is very compelling for Asia’s largest grinder, supported by robust earnings growth. The recent proposed Transcao Côte d'Ivoire acquisition, with access to additional capacity, could provide further upside.

• The record high 9M24 revenue of MYR7.1bn (+99.2% YoY) and core earnings of MYR242m were slightly below our expectation at 61% but within Street’s forecast at 68% of full-year estimates – with expectation of a strong close to 4Q24. Note: We added back the impairment loss of MYR26.2m (EUR5.2m) for its Germany operations related to the capitalised preliminary costs due to delays in its expansion plans there. It swung into an LBITDA of MYR12m (3Q23 EBITDA: MYR28m). Interest expenses increased by 109% YoY to MYR195m against our FY forecasts of MYR167m. Despite the increases in bean costs and working capital, the healthy YoY earnings growth were buoyed by increases in sales volumes for cocoa solids and higher ASPs. An interim dividend of 1 sen/share was declared, going ex on 11 Dec.

• QoQ improvement. 3Q24 core profit maintained GUAN’s QoQ (+24.4%) and YoY (+146.1%) growth trajectories to MYR83.4m – on back of the stellar revenue growth of MYR2.9bn (+132% YoY, +33.9% QoQ). This is despite the efficiency loss and higher input costs on lower production tonnage (-6k tonne QoQ) in Jun–Aug 2024 on delays in beans delivery amid port congestion issues. EBITDA yield (per tonne) expanded YoY to MYR2,298, from MYR923 and MYR1,545 in 3Q23 and 2Q24, reflecting the higher cocoa solids ASPs and favourable hedging position. Gearing position further deteriorated to 1.94x (2Q24: 1.71x) due to higher working capital needs on elevated bean costs and additional bean inventory for any potential shipment delays.

• Robust outlook remains. We expect the high cocoa butter ASPs to prevail from 4Q24 onwards and into FY25, given the 9- to 12-month forward selling mechanism. The current robust cocoa market conditions are anticipated to continue in view of the ongoing supply shortage due to adverse weather, swollen shoot virus, and backlog levels – coupled with sustained strong demand – which results in the prolonged elevated combined ratio.

• Forecasts. We factored in higher interest costs assumptions, resulting in a 9% cut in our FY24F earnings but relatively unchanged for FY25F-26F. Our TP is now at MYR6.22 as we roll forward the valuation base year to FY25, pegged to an unchanged 15x P/E (5-year mean) – on par with the Consumer Product Index. Our TP includes a 0% ESG premium/discount. Key downside risks include sharp raw material price fluctuations, weakening cocoa demand, a softening USD/MYR rate, and counter-party risks.

Source: RHB Securities Research - 27 Nov 2024