Guan Chong Bhd - Looking good

INVESTMENT MERIT

- Twin catalysts. The new capacity in Batam, which boasted its total capacity to 200k MT p.a. from 140k MT previously, will be the key earnings driver for Guan Chong Bhd (GCB). Another growth catalyst will be the potential strategic acquisitions and JVs for its overseas expansions in US, Brazil and Russia. It also plans to take over 49% of Carlyle Cocoa for a direct presence in US eventually. 

- Decent yield. It has commited to a 25% dividend payout, which started in FY11. In FY11, the company distributed an adjusted DPS of 7.5 sen or 3.7% yield. This year, the company is likely looking at a similar ratio with a 8.0 sen adjusted DPS, translating to a decent yield of 3.9%. 

- No direct comparison locally. There is no direct comparison in the local market. However, there are two similar companies listed on the SGX but they are not a fair comparison to GCB given the huge variance in market cap. Thus, we have compared GCB with the overall valuations of local consumer stocks. In this case, its current PER of 7.9x is a steep discount to the average consumer sector PER of 12x. 

- Potential rerating?  GCB is fairly valued at RM2.40, based on FY13 8x PER, which is in line with its 3-year average PER band. In view of the steep discount to the sector’s average PER of 12.0x, the implied PER is fairly low and we do not rule out a potential rerating on the stock due to 1) the increase in liquidity after the recent bonus issue, 2) decent yield of 3.9% and 3) the twin catalysts for positive earnings growth rate.

COMPANY UPDATES

- Its secondary listing plan in Singapore has been put on hold due to lower valuations accorded by the Singaporean market and the unfavourable cost of capital for GCB’s expansion plan.

- With Batam’s 2^nd  line recently commissioned in June 2012, GCB is expected to grind about 150-160k MT in 2012 (+20% more than FY11’s 127k MT/yr).

SWOT ANALYSIS

- Strength:  The 5th largest cocoa processor in the world with an extensive distribution network

- Weaknesses: Longer cash conversion cycle

- Opportunities:  Market expansion in US, Brazil, and Russia, M&A opportunities in US.  

- Threats: higher price of cocoa bean, a slower export market.

TECHNICALS

- Resistance: RM2.10 (R1), RM2.24 (R2)

- Support: RM1.95 (S1), RM1.88 (S2)

- Outlook: S-T (Bullish), M-T (Bullish), L-T (Bullish)

Comments:  Guan chong tested the RM2.10 resistance on three attempts forming a short term top. Should this level be overcome, further gains may be expected towards RM2.24. The indicators remain strong, and traders should look to buy on a breakout.

BUSINESS OVERVIEW

GCB in involved in the cocoa processing business and is the top five argest cocoa processors in the world with a total capacity of 200k MT/yr (80k in M’sia & 120k in Indonesia) with presence in Johor (Pasir Gudang), Indonesia (Batam), and USA (Delaware). GCB exports its “Favorich” brand of cocoa products to >60 countries; its clientele include world-famous cholocate makers and leading cocoa ingredient traders e.g. Mars, Lotte, Arcor, Apollo, and Tate & Lyle. Its export market accounted for 94.3% of its total revenue in FY11 with USA, Singapore, Russia and Netherlands as its top export markets with revenue contribution of RM501m, RM139m, RM103m and RM88m respectively in FY11.

BUSINESS SEGMENTS

GCB sources its cocoa beans mainly from Indonesia and Africa and processes it into cocoa liquor, cocoa butter, cocoa cake and cocoa powder. FY11 revenue breakdown by product range were:

 Cocoa butter (39%)

 Cocoa cake (30%)

 Cocoa powder (21%)

 Cocoa Preparations (5%)

 Cocoa liquor (3%)

 Covertures & Confectioneries (2%)

Source: Kenanga