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Guan Chong Rising Cocoa Prices Continue to Weigh on Margin

RESULTS UPDATE
GCB’s earnings for 1HCY23 came in below our expectations. We trimmed our CY23/24
NEUTRAL
Closing Price RM 2.07 earnings estimates by 7.6%/7.3% respectively, factoring in higher interest cost from
Target Price RM 2.34 the drawdown of its sukuk borrowing and the lower combined ratio which will result
Consensus Price RM 2.52 in tighter margins. We also maintain our NEUTRAL recommendation on GCB with a
lower TP of RM2.34 (-RM0.23) by pegging an unchanged 15.0x PER to our rolled-over
Stock Return Information CY24F EPS. We continue to like GCB for: 1) its position as the 4th largest grinder in the
KLCI 1,454.83 world, 2) expansion plan in Ivory Coast, Germany and UK, and 3) supplier to large
Expected s ha re pri ce return (%) 13.0 MNCs. Key downside risks include: 1) higher-than-estimated input and energy costs,
Expected di vi dend return (%) 1.5 2) lower-than-projected production volume, and 3) tight supply of cocoa beans due to
Expected tota l return (%) 14.6 unfavourable weather conditions.

Key Statistics Earnings below expectations. Despite 1HCY23’s revenue within our expectations,
Sha ri a h Compl i a nt YES which accounts for 47.5% of our previous full-year forecast, 1HCY23’s earnings of
Bl oomberg Ti cker GUAN MK RM51.9m still missed our expectations, only accounting for 25.8% of our previous full-
Ms i a Ti cker / Stock Code GCB/5102 year forecast, mainly attributed to higher financing costs from the sukuk issue and
Sha res Is s ued (m) 1,175.0 lower EBITDA margin.
Ma rket Ca pi ta l i s a ti on (RM m) 2,432.3
52 Week Hi /Lo Pri ce (RM) 2.76/2.03
Y-o-Y. Revenue decreased 3.1% to RM1,160.2m, from RM1,197.5m in the same
Avg Tra di ng Vol ume (3-mth) 283,945 quarter last year, mainly attributed to lower sales volume of cocoa butter and cocoa
Es t Free Fl oa t (%) 21.8 solids in Malaysia and Singapore, which were down 7.7% and 9.2% respectively. The
YTD Returns (%) -13.8 sinking of the butter and powder ratio, and rising cocoa price mainly drove the
Beta (x) 1.02 combined ratio lower, which limits the margins as well. PAT declined by
37.0% to RM28.1m, from RM44.6m, mainly due to higher interest rate during 2QCY23
Share Price Performance (%) which brought a 1.7x increase in finance costs, as well as commodity futures losses.
Price change Absolute Relative
1 mth -10.78 -11.44 Q-o-Q. The topline rose by 5.2% with an increase in sales volume of cocoa products
3 mth -8.81 -13.99 from the Malaysian and Singaporean segments, up 17.0% and 9.6% respectively. The
12 mth -10.39 -8.04 bottom line rose by 18.4%, underpinned by better sales volume that mitigated some
of the increase in finance costs and tax expenses.
Major Shareholders (%)
Guan Chong Resources Sdn Bhd 49.8
Dividend. The group did not declare any dividend in 2QCY23, as opposed to the 2.0
sen declared in 2QCY22.
1-Year Share Price Performance
Forecasts. We reduced our CY23/24 earnings estimates by 7.6%/7.3% as we adjusted
our cost assumptions, taking into consideration the higher cocoa prices and interest
expense as well as slower EBITDA margin expansion moving forward.

Figure 1: Historical and Forecast Financial Performance

FYE Dec (RM m) CY20 CY21 CY22 CY23(F) CY24(F)
Revenue 3,685.0 3,923.3 4,419.8 4,758.8 5,037.8
EBITDA 349.3 292.6 309.0 388.8 417.5
Analyst: Chai Jia Yue, Jessie EBITDA margin (%) 9.5 7.5 7.0 8.2 8.3
Email: chaijy@interpac.com.my PBT 267.3 196.8 188.1 209.3 229.2
PBT Margin (%) 7.3 5.0 4.3 4.4 4.5
PAT 222.8 154.9 147.5 167.5 183.4
PAT margin (%) 6.0 3.9 3.3 3.5 3.6
EPS (sen) 19.0 13.2 12.5 14.3 15.6
Earnings growth (%) 2.9 (30.5) (4.8) 13.6 9.5
PER (x) 10.9 15.7 16.5 14.5 13.3
DPS (sen) 3.5 3.0 3.5 3.2 3.3
Dividend yield (%) 1.7 1.5 1.7 1.5 1.6
ROE (%) 9.1 4.9 4.1 4.3 4.4
Net gearing ratio 0.7 0.9 1.0 0.7 0.9
P/B (x) 2.0 1.8 1.5 1.3 1.2
Source: Company, Inter-Pacific Research

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 Guan Chong Bhd

Outlook. The Intercontinental Exchange in London has seen cocoa prices hit a 46-year
high in reaction to tight cocoa bean supply due to the El Niño weather phenomenon
and cocoa prices have risen more rapidly than the average selling prices of cocoa
ingredients. Despite GCB’s effort in hedging against the rising cocoa prices, we expect
GCB’s combined ratio and margins to remain under pressure in the short term as cocoa
prices are continuing their upward trend.

The U.K. facility, with 16k tonnes of annual industrial chocolate production capacity,
was commissioned in 2QCY23. However, it is still pending approval on food audits from
the relevant authorities, which is expected to be completed by December this year.
We expect the commencement of U.K. facility to help GCB boost its share in the
European market in due course. On the other hand, we see an improved margin in
Germany’s SCHOKINAG plant, helped by the fixed electricity costs, despite the lower
sales tonnages in 2QCY23 due to delays in customer shipments. Furthermore, we still
see the SCHOKINAG’s plant maintaining its strong position in the European market
with higher average selling price of its end-products.

The rise in financing costs resulting from the drawdown of its sukuk issue increases
GCB's financial leverage, which also impacts its earnings. In 2QCY23, the increase in
trade loans denominated in USD also added to the company's liabilities, primarily due
to the weakening Ringgit. With both factors, we expect GCB to face challenges in
maintaining a balanced approach in expanding its business operations in 2H2023 and
for the full year.

Figure 2: Quarterly Results Comparison

FYE Dec (RM m) 2QCY23 2QCY22 YoY 1QCY23 QoQ 1HCY23 1HCY22 YoY
% % %
Revenue 1,160.2 1,197.5 (3.1) 1,102.5 5.2 2,262.7 2,188.0 3.4
EBIT 67.0 66.9 0.2 56.4 18.7 123.4 142.1 (13.2)
PBT 35.5 55.3 (35.8) 30.0 18.2 65.5 119.9 (45.3)
PAT 28.1 44.6 (37.0) 23.8 18.4 51.9 97.9 (47.0)
EPS (sen) 2.4 4.2 (43.4) 2.0 18.3 4.4 9.3 (52.4)
ppt ppt ppt
EBIT margin (%) 5.8 5.6 0.2 5.1 0.7 5.5 6.5 (1.0)
PBT margin (%) 3.1 4.6 (1.6) 2.7 0.3 2.9 5.5 (2.6)
PAT margin (%) 2.4 3.7 (1.3) 2.2 0.3 2.3 4.5 (2.2)
Source: Company, Inter-Pacific Research

Figure 3: Geographical Breakdown

FYE Dec (RM m) 2QCY23 2QCY22 YoY 1QCY23 QoQ 1HCY23 1HCY22 YoY
Revenue % % %
Malaysia 281.8 305.2 (7.7) 240.8 17.0 522.6 622.3 (16.0)
Singapore 501.8 552.9 (9.2) 457.9 9.6 959.7 882.2 8.8
Indonesia 53.0 63.8 (17.0) 75.8 (30.1) 128.8 143.0 (10.0)
Germany 301.9 252.0 19.8 303.3 (0.5) 605.2 500.7 20.9
Ivory Coast 0.0 - n.a. 0.0 (35.0) 0.0 - n.a.
Others 21.8 23.6 (8.0) 24.7 (11.9) 46.5 39.9 16.5
Source: Company, Inter-Pacific Research

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Figure 4: 12-Month Forward PER

Source: Bloomberg, Inter-Pacific Research

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 Guan Chong Bhd

Declaration of Independence of Opinions and of Interest in Securities

The analyst(s) responsible for the production of this report hereby certifies that the views expressed herein accurately and
exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and
were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or
indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. Inter-Pacific Research Sdn Bhd prohibits
the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific
investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information
barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the
analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or
the performance of his/their recommendations and the research personnel involved in the preparation of this report may also
participate in the solicitation of the business. In reviewing this research report, an investor should be aware that any or all of the
foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the
duties of confidentiality, available on request.

(i) As of September 6, 2023, Inter-Pacific Research Sdn Bhd has a proprietary position in the securities (which may include but not
limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies mentioned or
recommended in this report: (a) Guan Chong Bhd,

(ii) As of September 6, 2023, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities
(which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or
companies covered or recommended in this report: (a) Chai Jia Yue – nil.

Signed

Victor Wan Kum Seng

Head of Research
Inter-Pacific Research Sdn Bhd

Signed

Victor Wan Kum Seng

Head of Research
Inter-Pacific Research Sdn Bhd

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 Guan Chong Bhd

Rating Systems
Ratings: Description:
BUY Total return is expected to exceed 15% in the next 12 months
TRADING BUY Total return is expected to exceed 10% in the next 3 months
NEUTRAL Total return is expected to be between –15% to 15% in the next 12 months
SELL Total return is expected to be below -15% in the next 12 months
TRADING SELL Total return is expected to be below -10% in the next 3 months
NOT RATED The stock is not within regular research coverage

Abbreviation
Abbreviation Definition Abbreviation Definition
PER Price Earnings Ratio CAGR Compounded Annual Growth Rate
PEG PER to Growth CAPEX Capital Expenditure
EPS Earnings per Share DPS Dividend per Share
FYE Financial Year End ROA Return on Asset
FY Financial Year ROE Return on Equity
CY Calendar Year PBT Profit Before Tax
MoM Month-on-Month PAT Profit After Tax
QoQ Quarter-on-Quarter EV Enterprise Value
YoY Year-on-Year EBIT Earnings Before Interest & Tax
YTD Year-to-Date EBITDA EBIT Depreciation & Amortisation
p.a. Per Annum WACC Weighted Average Cost of Capital
DCF Discounted Cash Flow NTA Net Tangible Asset
FCF Free Cash Flow BV Book Value
NAV Net Asset Value

IMPORTANT: This report has been prepared from sources that are believed to be reliable but we do not hold ourselves responsible for its completeness and accuracy.
All opinions and estimates in this report are subject to change without notice. We do not accept any liability that may arise from the use of information in this report.
Inter-Pacific Research Sdn Bhd and or its associates may from time to time have interest and/or underwriting commitments in the company being reported. This report
is for internal circulation only and the contents or any part thereof cannot be reproduced in any manner whatsoever except with the prior written consent of Inter-
Pacific Research Sdn Bhd.

Published by:

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General Line : 03-2117 1888 Fax : 03-2142 7678

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Guan Chong Bhd

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