Cocoaland Holdings - Poised to hit earnings inflexion point Buy

- Following a company briefing, we re-affirm our BUY recommendation on Cocoaland Holdings (Cocoaland), with a higher fair value of RM3.05/share (vs. RM2.75/sharepreviously) as the group looks poised to hit an earnings inflexion point. Our valuation continues to peg FY13F revised earnings to a fair PE of 15x, or at a 15% discount  to F&N Holdings’s (FNH Mk Equity, Hold) 5-year mean of 18x.  

- Our FY12F EPS forecast is maintained, but we raised FY13F and 14F EPS by 9% and 11%, respectively. The group’s solid 3-year CAGR of 28% will be underpinned by additional production capacities and the deepening in distribution channels.    

- We understand plans are afoot for the installation of a new   line each for the production of core hard candy and fruit gummy to alleviate current supply constraint. Upon commercialisation by 1QFY13F, the new lines are expected to lift installed capacities by 360% for hard candies and 160% for gummies. This potentially translates into an additional ~RM158mil of revenue per annum.

- Additionally, the group is targeting to kick-start construction of Factory #6 in Rawang for chocolate and wafer production next year. With a capex of RM30mil (building: RM10mil, machineries: RM20mil) and a planned annual capacity of 4 million kg, the new factory is anticipated to power the group’s earnings growth from FY15F onwards.

- We are also encouraged to learn that management is eyeing to accelerate growth in the export markets via organic growth and other sales channels. For instance, the planned set-up of a trading company in Jakarta, Indonesia in 2QFY13F should boost sales of gummies and “CocoPie” and aid market share growth in the populous country.  

- More importantly, greater emphasis will be given to Cocoaland’s proprietary brands. This bodes well for the group as it will serve to mitigate some of the risks from volatile raw material prices such as sugar and fruit concentrates. Proprietary brands command better margins and account for 80% of the group EBIT. 

- In the near term, the finalisation of the group’s franchise business model with a few MNCs should act as a strong catalyst to share price. We understand Cocoaland is in the final stages of signing up interested parties for the distribution and sales of the group’s gummies and hard candies in Malaysia, Singapore, Brunei, Vietnam and Thailand. This, in turn, would ensure high utilisation rates given secured off-takes for the group’s products. Another key catalyst is product synergies from potential change in ownership of associate F&N Holdings.   

Source: AmeSecurities