FULLY VALUED RM1.65
KLCI : 1,745.42
Price Target : 12-Month RM 1.35
Earnings risks ahead
Weak 2Q13 earnings reports by industry peers suggest lower profits q-o-q for Guan Chong Depressed margins due to weak selling prices (especially for cocoa powder) pose earnings risk
Maintain Fully Valued with RM1.35 TP (pegged to 7.5x FY14F FD EPS)
Industry headwinds. Recently released financial reports by JB Foods and Petra Foods indicate the cocoa ingredient processing industry is still facing tough times. In the Apr-Jun quarter, excluding lumpy inventory adjustments/exceptional items, JB Foods saw its net loss widen to RM8.5m (from RM1.5m net loss in 1Q13), while Petra Foods’ cocoa ingredient business posted USD25m operating net loss (vs. USD18m net loss in 1Q13). Both companies attributed the poor results to weaker ASP (likely the case for cocoa powder products).
Earnings risks ahead. Amid prevailing adverse cocoa market conditions, Guan Chong’s 2Q13 earnings (due out this week) might also be weaker than 1Q13 net profit of RM17m and RM35m in 2Q12. Nevertheless, we expect it to remain profitable with better contributions from cocoa butter (higher butter ratio) partially offsetting the weak cocoa powder business.
Maintain Fully Valued. Guan Chong could face earnings pressure for the rest of FY13 and beyond if cocoa prices remain volatile amid the ongoing industry consolidation. Pending more details in its upcoming result announcement/analyst briefing, we are keeping our FY13-14F net profit of RM95m (-20% y-o-y) and RM99m (+4% y-o-y). Our TP is also unchanged at RM1.35, pegged to 7.5x FY14F fully diluted EPS of 18 sen.
Publish date: 21/08/13