This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.
Cocoaland Holdings Bhd enjoyed a record-breaking year in 2015 but whether the homegrown confectioner can maintain its growth momentum this year is a big question, especially in the face of rising raw material and labour costs as well as subdued consumer spending.
Indeed, Cocoaland executive director and finance director Tai Chun Wah sees a challenging year for the group with ingredient and labour costs expected to increase by between 15% and 30%, and 10% respectively.
On top of that, local consumers have become more cautious about their spending, especially after the implementation of the Goods and Services Tax last year, he says.
“This year will be very tough for local manufacturers. We will strive to achieve another record-breaking year but it’s really hard to say because there is a lot of uncertainty in the Malaysian economy,” he tells The Edge.
Tai, 49, is a 20-year veteran who joined Cocoaland in 1996 as an accountant before he was appointed to the board in 2012.
Cocoaland achieved a record net profit of RM32.72 million in its financial year ended Dec 31, 2015 (FY2015), while revenue hit an all-time high of RM261.64 million. The sterling performance was attributed to better production efficiency, deeper market penetration and a stronger new product line-up.
Foreign exchange gain was another plus factor that contributed an additional profit of RM2 million to RM3 million to Cocoaland, which exports its confectionery products to the US, the Middle East, Hong Kong, Australia and Europe. Sales in the export markets accounted for 58.2% of the group’s revenue in FY2015.
As much as Cocoaland would like to, it is a tall order to match FY2015’s performance, Tai acknowledges. “Based on our track record, I am sure we can deliver satisfactory growth in the top line. However, the bottom line is beyond our control because of the cost element.”
Tai cautions that the cost of ingredients, mainly sugar and gelatin, is expected to rise, following a recovery in crude oil prices in recent months. “Last year, our ingredient cost was still at a low level. This year, we expect the prices of most of the ingredients to increase. For example, the [prices of] plastic packaging materials will be going up due to the higher oil price while the prices of sugar and chocolate powder are also moving up.”
He goes on to say that the hike in minimum wage and foreign worker’s levy will also pile on the pressure this year. “Starting from July 1, the minimum wage will be raised from RM900 to RM1,000. Don’t forget, the existing workers who are getting RM1,000 now will ask for more.”
The increase in the foreign worker’s levy for the manufacturing sector, from RM1,250 to RM1,850, will only make it more difficult for the local manufacturer to hire migrant workers, he points out.
While the demand for snacks and candy remains strong, Tai admits that Cocoaland is facing stiffer competition at home. Therefore, the group plans to penetrate the Vietnam, Indonesia, Thailand and other Indochina markets.
Apart from being the largest fruit gummy producer in Malaysia, Cocoaland also produces soft drinks, hard candy, snacks, wafers, cookies and chocolate. Its more famous brands are Lot 100, Cocopie, Koko Jelly and Fruit 10.
The confectioner currently operates five manufacturing facilities in Rawang, Kepong and Kampar. A piece of land was acquired in Rawang in 2011 for the construction of a warehouse, which is expected to cost less than RM10 million and be ready in 2018.
Cocoaland’s story began when two brothers started out as small-time vendors selling deep-fried snacks and banana fritters in the Klang Valley. They were later joined by other brothers and moved upstream to benefit from higher margins.
In the mid-1980s, the brothers identified a market opportunity for the manufacture of polytubed drinks, which enabled the company to venture overseas, exporting to the Middle East, and to purchase a factory.
Today, Cocoaland is managed by 10 siblings of the Liew family. As at Feb 29, the founders and family owned the lion’s share (39.4%) of the company while Fraser & Neave Holdings Bhd was the second largest shareholder with a 27.2% stake.
Cocoaland came under the spotlight last year after receiving two separate buyout offers from private equity firm Navis Asia V11 Management Co Ltd and Hong Kong-listed First Pacific Co Ltd.
The RM2.20 per share offer by Navis was rejected by Cocoaland’s board before First Pacific withdrew its non-binding offer of RM2.70 per share. First Pacific is controlled by Indonesian tycoon Anthony Salim of Salim Group. He emerged as a substantial shareholder of locally listed poultry farmer CAB Cakaran Corp Bhd early this year.
Cocoaland’s shares closed at RM2.24 last Thursday, giving the company a market capitalisation of RM512.51 million.
Tai tells The Edge that the door is still open to any potential buyer as the Liew family’s stake in Cocoaland is still up for sale.
“The family is prepared to sell the business because there is no second generation to take over. We are quite open to interested parties, be they foreign or local,” he says, adding however that there is no new or revised offer on the table yet.
“Negotiations are ongoing. We [the management] wouldn’t know who the potential buyers are. But after two rounds of failure, I believe both parties will be more cautious. It’s all about good pricing, not only for the seller but also the buyer,” he comments.
“Some of the foreign manufacturers have started to bring their products into Malaysia, creating an uncomfortable environment for local manufacturers like us. The industry is very competitive; every player wants to make money but the domestic market is only that big.”
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