Cocoaland Holdings - More candies coming to lift earnings BUY

- We re-affirm our BUY recommendation in Cocoaland Holdings Bhd (Cocoaland), with an unchanged fair value of RM3.05/share, following a company visit with management recently. Our fair value is pegged to a 15x PE on our FY13F earnings or at a 13% discount to F&N Holdings (FNH MK Equity, HOLD) average 5-year PE of 17x.

- Our FY12F-FY15F EPS forecast is maintained. To-date, the group have declared a total dividend of 5.0sen, translating into yields of 2.5%. Earning is expected to rise by 23% in FY13F with a three-year earnings CAGR of 28% for FY12/15F, driven by:- (1) Upcoming new production lines to free up bottlenecks that the group is currently facing. New lines are expected to begin commercialisation in 4QFY12 for hard candy (1 new line) and 1QFY13 for fruit gummy (2 new lines). Installed capacity will be lifted by 160% for fruit gummy and 360% for hard candy. Current utilization rate is 95% and 50% for fruit gummy and hard candy, respectively, for 9MFY12. (2) Finalisation of the franchise business model with some MNCs is expected to complete in 1QFY13. Thus, we opine that this would ensure higher utilisation rate and minimising any idle capacity. Agreements are between 2-5 years, with an option to renew.  (3) Management highlighted to accelerate growth in the export markets organically within the IndoChina region, particularly for fruit gummy and CocoPie products. That said, the setting-up of a trading company in Jakarta is targeted to complete by 2QFY13 for distribution activities of fruit gummy and CocoPie. Export market share have been growing progressively to 54% in 1HFY12.

- Meanwhile, construction of Factory #6 is targeted to kick-start next year and commercialise in early 2015. This is a positive as it will power up the group’s earnings growth from FY15F onwards given annual production capacity of 4mil kg for chocolate and wafer products. 

- F&N recently launched a new premium non-carbonated version of 100 Plus product called “100 Plus Edge” in November. Given F&N’s lack of hot-fill PET bottling technology and  associate status, Cocoaland is the sole contractor packer to  prepare, package, pack and deliver F&N’s 100 Plus Edge in Malaysia. Capacity utilisation of the beverage segment should life from the current 45%, if the 100 Plus Edge is well-received. 

- More importantly, Cocoaland is backed by a strong balance sheet and zero borrowing position. This is supported with a healthy cash pile of RM33mil as at end-3QFY13.

- The stock is trading at an attractive PE of 11x FY13F, below its historical 5-year average PE of 16x.   

Source: AmeSecurities