RHB Research has kept its buy call on Cocoaland with an unchanged target price of RM2.70. Although 1Q20 earnings are expected to be weaker due to Covid-19, Cocoaland was allowed to operate during the MCO with only minor disruptions.
“Beyond the Covid-19 concern, we believe growth prospects and fundamentals will remain intact, riding on the robust demand for gummy products,” said its analyst Muhammad Afif Zulkaplly.
Cocoaland’s plant was allowed to operate during the Movement Control Order (MCO) with 50% of the workforce, but encountered minor logistics issues and disruption of raw material supply. The gummy lines were running at 80% utilisation rate vs 85% last year.
Cocoaland is expected to record lower export sales, especially to China and Hong Kong, due to weaker demand caused by the pandemic. Local demand was also weaker and Aidilfitri sales could be a lot softer this year given the social distancing initiatives.
Meanwhile, Cocoaland’s capacity expansion plan is likely to be further delayed due to the MCO, said RHB.
It estimates 1Q20 earnings to be RM6-8 mil, down quarter-on-quarter and year-on-year mainly dragged by lower export sales. Note that China, Hong Kong, and Singapore collectively contribute 28% of Cocoaland’s total sales.
As crude oil and resin prices continue to decline, packaging cost which accounts for 45% of raw material costs, is expected to remain low. On the other hand, the increase in minimum wage to RM1,200 (from RM1,100) effective Feb 1, is expected to cost the company RM720,000 per annum.
On the recent directive from the government that all foreign workers in the country should undergo a compulsory Covid-19 testing, based on RHB’s estimation, it will cost Cocoaland RM1.8 mil, assuming RM300 per test.
Margins should remain stable, as a lower packaging cost could partially offset higher wages, said RHB. Subsequently, 2Q20 could see weaker local demand as Malaysia implemented the MCO from March 18.
RHB trimmed its FY20-22F earnings by 7%, 7% and 6% respectively after imputing more conservative sales assumptions and taking into account a delay in capacity expansion. Key risks include a sharp rise in raw material costs, stronger RM/USD, and further delays in the commissioning of new production lines. — May 8, 2020
