• Keep BUY and MYR6.22 TP, 107% upside and c.3% FY25F yield, pegged to an unchanged 15x FY25F P/E and 0% ESG premium/discount pencilled in. We remain sanguine on Guan Chong’s earnings outlook, supported by uptrending margin from favourable ratios and healthy demand. At merely 7x P/E on robust YoY results, we believe market is underappreciating the world’s fourth largest grinder’s earnings potential with room for expansion as the catalysts play out.

• 3Q24 operating statistics. Sales tonnage rose 15.6% YoY and 6.6% QoQ on higher sales on cocoa solids but production tonnage fell 2% QoQ (+3.3% YoY) due to delay in bean delivery (port congestion), while its overall plant utilisation rate was slightly lower at 94%. Ivory Coast factory utilisation rate improved to 87% QoQ from certain power outages in 2Q. In Europe, Schokinag experienced some delays in order uptake due to the high selling prices as customers delayed in taking delivery to better manage working capital but overall utilisation should improve on robust demand. In UK, the new industrial chocolate plant delivered a maiden revenue of GBP5m in 3Q24 with 22 tonnes (current 16k) of capacity expected to be ready by 2H24. For GUAN’s 3Q/9M24 results, please see our Results Review report.

• Cocoa bean prices have reaccelerated. Major chocolate makers are guiding for a flattish or marginal downtrend in their overall sales volume against lower grinding output of -6% YoY and bean production of -14% YoY – implying demand remains healthy as chocolate makers opt to deplete their inventory while delaying purchases. These factors, coupled with a downward revision in estimated crop output (affected by weather, swollen shot virus, poor bean quality) have prompted major chocolate makers to cover their forward buying – resulting in the sharp surge in the terminal cocoa bean price – amid the expectation of persistent tight supply in the near term.

• Lower forward sale. Despite the lower-than-expected forward sale secured for FY25 (1H: ~70%; 2H: ~20%) due to chocolate makers adopting a wait-andsee approach amid the backwardation of cocoa bean futures, management remains confident that buyers will eventually start to cover their purchases as the current hand-to-mouth situation is likely to stay. While gearing deteriorates, management is not overly concern as it is an industry-wide norm and the company is able to pass on the higher working capital costs.

• The acquisition of a 25% stake in Transcao Coté d’Ivoire (CI) will allow GUAN to market the 70k-80k-tonne additional capacity at minimal capex to capture more sales and market share amidst current favourable market conditions. Meanwhile, an established partnership with the local authority would aid in securing the highly sought-after EUDR-compliant beans.

• 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 - 28 Nov 2024