Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on September 17, 2019

KUALA LUMPUR: Cocoaland Holdings Bhd, contented with organic growth in the last three decades, has now set its sights on mergers and acquisitions (M&A) as it seeks to accelerate its growth and ensure future sustainability.

“We are looking for [M&A] as it is a method for us to grow faster, and we are especially targeting those from overseas,” said the gummy candy manufacturer’s executive director Tai Chun Wah.

“We are also looking to acquire or work together with a similar size company, subject to the shareholders’ approval,” Tai told The Edge Financial Daily.

He said Cocoaland has set aside US$10 million (RM41.7 million) for potential M&A opportunities in Indonesia and Vietnam. It is also looking at opportunities in Malaysia but there are no proposals yet.

Separately, Cocoaland is investing RM50 million in a fourth gummy candy manufacturing line, as the existing three lines are close to full capacity utilisation, said Tai.

The existing lines have a total annual capacity of 8,300 tonnes, and the fourth line will add another 4,000 tonnes yearly, he said.

Tai said RM8 million has been spent to buy a piece of land for the fourth line, and another RM30 million will be used over the next six months for the machinery.

“This [fourth line] is much more costly than the other lines because it is very highly efficient with very minimum labour costs involved,” he said.

The heavy investments are unlikely to affect the payment of dividends.

As at June 30, 2019, Cocoaland’s cash and cash equivalents stood at RM104.43 million, while borrowings were zero. Historically, despite not having a dividend policy, Cocoaland’s average dividend payout record over the past decade stood at 75%.

Tai said Cocoaland is upscaling its capacity to meet the “very good” demand for gummy candies, especially in the Chinese market, South Korea, Hong Kong and Taiwan.

“The demand for gummy candies is still there. When we are stressed up or tired, eating gummy candies or sweets, chocolates makes us happier and less stressed,” he said.

Tai said the group has also been focusing on research and development as it has to keep developing more products to avoid bottlenecks.

“Today, perhaps our mango gummy has a very good demand, but we have to keep trying to develop another good product that can sustain Cocoaland’s growth soon,” he said.

Gummy candies make up 51% of Cocoaland’s revenue. The group also manufactures chocolates, hard candies, cookies, wafers, snacks and beverages. Its popular brands are Lot 100, Koko Jelly, Cocopie and Fruit 10.

 

Group targets to see no more decline in earnings

After two consecutive years of earnings decline, Cocoaland is hoping to at least maintain the previous year’s performance for the current financial year ending Dec 31, 2019 (FY19). If there is an improvement, then that would be a “bonus” for the group, said Tai.

For FY18, Cocoaland’s net profit fell 7.8% to RM30.91 million, from RM33.53 million in FY17, due to rising labour costs and escalating packing material costs, while revenue dropped 4.6% to RM25.73 million from RM265.91 million previously.

However, thanks to the rising demand for gummy and snack products Cocoaland’s profit rose 18.8% to RM17.02 million for the first six months of FY19, compared with RM14.32 million in the same period of FY18.

Revenue slid 2.1% to RM124.35 million from RM126.98 million.

Cocoaland said the improved earnings were also due to a higher profit margin from the product sales mix and improved performance resulting from cost rationalisation.

“Since October last year, the management has implemented labour cost-saving measures, cutting down unnecessary headcount at the operational level. We have retrained certain staff to increase productivity. All these [measures] have improved our productivity,” Tai said.

RHB Investment Bank Bhd analyst Muhammad Afif Zulkaplly, in a research note last month, projected Cocoaland’s net profit to rise to RM35 million in FY19 and RM40 million in FY20, with revenue increasing to RM293 million and RM320 million respectively.

Maintaining a “buy” call on the stock, he said Cocoaland’s automation drive has shown results with reduced overtime hours required for production.

Moving forward, it will effectively mitigate any cost spikes arising from potential increases in minimum wage and changes in foreign workers’ levy policies.

Of the three analysts covering the counter, one has a “buy” call and the other two a “hold” call, with target prices ranging between RM1.93 and RM3.10.

Cocoaland’s share price has been on the downtrend in line with the drop in earnings. The stock closed unchanged at RM1.88 last Friday, giving the group a market capitalisation of RM430.1 million.

After trading above RM2 since March 2017, the counter fell below that level on Oct 11, 2018. It has continued to stay below RM2 since mid-March this year.

 

Still feeling the cost pressure

Weighed down by cost pressure, Tai expects prospects to remain challenging.

Like other companies, Cocoaland expects to be affected by the higher minimum wage. Tai said if the government keeps to its plan to increase the minimum monthly wage to RM1,500 in the fifth year of its term, the additional RM400 extra cost per head translates into a 36% increase in labour costs.

He said it would be difficult for the group to absorb the additional costs and would most likely have to pass the costs to customers.

Tai said the weakening ringgit against the US dollar also affects the group as most of its raw materials are quoted in the US currency. On the other hand, when the ringgit is stronger against the currencies of its export markets, it leads to lower export sales. Currently, exports make up 55% of the group’s total sales.

“As long as it is not volatile, we are comfortable, even at the current levels now,” said Tai, when asked if Cocoaland is heavily impacted by the decline in the ringgit’s value against the greenback.

      Print
      Text Size
      Share