Cocoaland Holdings - More catalysts ahead

INVESTMENT MERIT

- Broadly in line with ours. The latest net profit (NP) reported of RM4.4m brought its FY12 NP to RM21.2m. This was broadly within our expectation (-6%) but below that of the consensus estimates (-9%). The FY12 NP rose 10.6% from RM19.1m to RM21.2m on the back of a 28.3% rise in the revenue. This was mainly attributable to a selling price hike and a higher trading volume in fruit gummy and beverage products, which saw revenue growth of 18.0% and 145.0% respectively. A 1.25 sen was declared in 4Q12, bringing FY12 NDPS to 6.25 sen, or 3% yield, which was in line with our 6.5 sen projection.

- Producing more candies. The new production line for hard candy has started its commercial operation in 2Q12 while the fruit gummy production line is targeted to commence in 1Q13. To recap, its hard candy production capacity has been boosted from 1.0m kg to 4.6m kg while the fruit gummy capacity will increase from 4.5m kg to 11.7m kg. This will free up the bottlenecks that the company is now facing. The higher production capacity will help the strategy to widen its existing client base and penetrate more local and overseas markets.

- Synergy from takeover of F&N by ThaiBev? Thai Beverage Plc (ThaiBev), which is controlled by Thai billionaire Charoen Sirivadhanabhakdi, said it owned 90.3% of F&N share at the conclusion of its offer on the 19 Feb-13. We understand that the motive of Charoen in taking over is to fulfill his strategic plan to expand into the F&B market of Southeast Asia. Note that F&N has a substantial stake of 27.2% in Cocoaland. Cocoaland is also the nonexculsive contract packer for F&N to prepare, package, pack and deliver F&N’s products in Malaysia. We would think that ThaiBev will still need F&N’s existing manufacturing partners as well as their distribution channels to achieve this goal. Hence, we foresee the development in F&N by ThaiBev is likely to bring in more positive synergies to Cocoaland.

- Reiterate our Trading Buy call with a lower TP. Based on the past dividend payout of c.50%, we are projecting FY13-14 NDPS at 8sen-10sen, yielding 4%-5%. Given its bright prospects in FY13-14 and a decent dividend payout, we are reiterating our Trading Buy call with lower fair value of RM2.76 based on 16.5x FY13 PER (17.7x previously), which is its 5-year average.

SWOT ANALYSIS

- Strength: i) Established OEM partnership with MNCs and ii) Rising revenue contribution from the export market.

- Weaknesses: Less renowned proprietary brands.

- Opportunities: i) Higher production capacity for hard candy&fruit gummy; ii) Venture into franchise business; iii) New plant construction; iv) New business opportunities in Vietnam, Indonesia & China.

- Threats: i) Increasing raw material costs and ii) Intense competition in the domestic and export markets.

TECHNICALS

- Resistance: RM2.25 (R1), RM2.60 (R2)

- Support: RM2.00 (S1), RM1.75 (S2)

- Comments: Since our last “OR” report, COCOALAND’s technical picture has worsened slightly. The Upwards sloping trendline has been violated, and the share price has retested the next crucial support level of RM2.00. Nevertheless, we expect this level to hold up and would not rule out a near term rebound towards RM2.25.

BRIEF BACKGROUND

Cocoaland Holdings Berhad was incorporated on 6 June 2000 and was subsequently listed on 18 January 2005. Cocoaland’s listing status was transferred to the Main Board on 18 July 2006. Cocoaland Holdings Berhad operates in the business of manufacturing and trading of processed and preserved foods and other related foodstuffs. The company's products include candy, canister, cookies, drinks, gummy, hamper, juice, pudding and jelly, snack and wafer.

BUSINESS OVERVIEW

- Cocoaland manufactures for the OEM market. Its manufacturing arm is housed in 5 factories in Rawang, Kepong and Kampar for its house brand and the OEM market. The OEM products are distributed to reputable manufacturers such as GSK, Ribena, Nestle and Wrigley.

- Cocoaland is F&N’s non-exclusive contract partner for preparing, packaging and delivering F&N products in Malaysia. F&N owns a 27.2% interest in Cocoaland.

- It mainly focuses on 3 industrial food categories (snack food, chocolate & sugar confectionery and soft drinks) under its proprietary brands like Lot100, Koko Jelly, CocoPie, Rotong, Mite and Fruit10.

Source: Kenanga