HEALTHY demand for cocoa products and further expansion are some of the reasons RHB Research has retained its buy on Guan Chong Bhd.
The cocoa grinder is expected to post resilient earnings for the second quarter of the financial year (2Q20F) “and stay the course for a sixth consecutive year of growth”, RHB analysts Lee Meng Horng and Muhammad Afif Zulkaply said in a note today.
Consumers looking for comfort food has been cited by Lee and Muhammad Afif as among the chief reasons for sustained demand.
Demand from this segment was enough to offset the slump in the upmarket chocolate segment which relies heavily on tourism and hoteliers, they added.
“De-commoditising cocoa powder is serving Guan Chong well during this challenging time, as it was able to offset any weakness in the sale of cocoa butter, which relies on the premium chocolate market
“Given the value-add customisation and wider usage of cocoa powder today, Guan Chong’s cocoa powder selling price is less susceptible to the external environment,” Lee and Muhammad Afif said.
Production should improve further in the second half of this year, they said, “as operations normalise while demand for mass market chocolate remains robust despite Covid-19.”
The cocoa grinder had managed to sustain its utilisation rate at an optimal level of 95% and demand for mass-market chocolate “remains healthy as the stay-at-home theme plays out globally”, the analysts said.
They expect production to “improve further sequentially” for the remainder of this year “as the market heads for normalisation”.
Guan Chong’s Ivory Coast and Europe ventures have been marked as potential earnings rerating catalysts, Lee and Muhammad Afif said, while further expansion, and mergers and acquisitions could potentially push the cocoa grinder to make inroads into Europe and other downstream segments.
“With the view of the pandemic posing minimal impact to earnings, we increase our FY20F-22F earnings by 10%,” they added.
Key risks, the analysts said, include cocoa bean price volatility and prolonged uncertainty over the living income differential issue where farmers have been pushing for better prices per tonne of cocoa.
Guan Chong’s shares trended 2.69% lower at RM3.26, giving the company a market capitalisation of RM3.35 bil. – Aug 10, 2020
