Buying SHG likely to enhance Guan Chong’s earnings

This article first appeared in The Edge Financial Daily, on February 19, 2020.
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Guan Chong Bhd
(Feb 18, RM3.13)
Maintain buy with a higher fair value of RM3.51:
Our earnings forecasts for Guan Chong Bhd for financial year 2019 (FY19), FY20 and FY21 are raised 8.9%, 5.8% and 0.4% respectively, to account for an estimated higher earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne. We expect Guan Chong’s FY19 results, to be announced by the final week of February, will be a net profit of RM230 million to RM240 million — up 21% to 27% year-on-year.

We believe Guan Chong’s earnings for the fourth quarter ended Dec 31, 2019 to continue being strong as the US dollar versus ringgit remains steady quarter-on-quarter (q-o-q). Due to its hedging practices, we anticipate a largely unaffected Ebitda per tonne despite an 8.7% q-o-q increase in cocoa bean prices. We estimate an Ebitda at about RM1,390 per tonne for FY19 versus RM1,300 per tonne for FY18.

Guan Chong would be setting up a new plant in Ivory Coast, expected to increase its production capacity by another 60,000 tonnes. Constructing the plant, at about €55 million, is estimated to take over 1½ years. It is expected to be operational by the first quarter of 2021.

The new plant is expected to maximise cocoa beans’ yield potential, reduce transportation costs and expand the group’s market presence and competitive advantage in Europe through a tariff-free deal between Ivory Coast and Europe.  

Our view that the proposed acquisition of Schokinag Holding GMBH (SHG) to be positive for Guan Chong’s long-term prospects is maintained. Though we have not accounted for SHG’s contribution in Guan Chong’s profit and loss pending further information from the management, but acquiring SHG would enhance earnings.

Key reasons for the proposed acquisition: To strengthen the group’s position in Europe — the biggest consumer market for chocolates, complement its upcoming plant in Ivory Coast and attain SHG’s expertise such as understanding the European consumer market’s taste profile. — AmInvestment Bank, Feb 18