Cocoaland Holdings - Solid FY12, one franchise agreement inked! BUY

- We re-affirm our BUY recommendation on Cocoaland Holdings, with a lower fair value of RM3.00/share, vs. RM3.05/share previously, following fine-tuning of earnings. Our fair value is pegged to an 18x PE on FY13F earnings.

- Cocoaland reported a 4Q net profit of RM4mil (-2.7% QoQ, -49% YoY), bringing FY12 core earnings to RM21mil (+11% YoY). This missed our estimate by 11% and consensus by 10%. The variance was due to commissioning cost of a new Fruit Gummy production line and higher A&P expenses.

- Declared a final dividend of 1.25 sen/share, bringing the total for FY12 to 6.3 sen/share. Dividend yield stands at 3%. Our projected dividend is <40% of earnings, in-line with the 5-year historical trend.

- Underlying core strength in a solid FY12 was largely attributed to higher selling prices, and volumes of Fruit Gummy and beverage products, for which revenue grew 18% and 145%, respectively. 4Q PBT fell 2.7% QoQ and 49% YoY, despite recording a revenue growth.

- The new Fruit Gummy line is expected to commence in 1QFY13, lifting capacity by 160%. This enables the group to alleviate the current supply constraint.

- The group has inked a merchandise licence agreement (franchise business). Cocoaland, as the licensee, is granted the use of the “Angry Bird” trademark. The agreement is valid for two years. The group is currently in the midst of securing another franchise agreement.

- Sales of Angry Bird products will commence in March – for an estimated revenue of RM2mil, with a 6% royalty fee to the licensor. We believe the product should be well-liked, particularly for those between the ages of 0-12 years. This is underpinned by the craze and well-established popularity of the products.

- All in, we have trimmed our numbers on account of slower-than expected contributions and finalisation of the franchise business (sales were previously estimated to flow in by January FY13). We continue to project an upward earnings trajectory, by 12%-15% for FY13F-FY15F, underpinned by increasing demand.

- Incorporation of a trading company in Jakarta is in progress for the Fruit Gummy and CocoPie distribution. It is targeted to be completed by 2QFY13.

- Charoen is the new controlling shareholder of F&N Singapore (which owns 56% of F&N Malaysia). This serves as a positive for Cocoaland. Charoen’s well-established position in Thailand and potential synergies such as cross-selling of products between F&N Malaysia and Thai Beverage is likely to benefit Cocoaland’s business.

- The stock is trading at a trough valuation of 14x PE for FY13F; hence, our BUY call.

Source: AmeSecurities