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This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.

 

COCOALAND Holdings Bhd does not expect its confectionery business to be affected by poor consumer sentiment, says founder and executive director Liew Fook Meng, adding that candy is not something consumers cut down on during an economic slowdown. 

“Eating candy makes people feel a little bit better,” he jests after the company’s extraordinary general meeting last week. 

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According to Liew, Cocoaland’s gummy candy business, which has gained quite a following in China, contributes about 40% to its revenue and will continue to drive the company forward. 

Cocoaland (fundamental: 2.80; valuation: 1.70) produces 8,000 to 9,000 tonnes of gummy candy a year. 

The EGM saw shareholders approve the company’s proposed bonus issue of 57.2 million new ordinary shares on the basis of one bonus share for three existing Cocoaland shares. 

Operationally, the confectionery manufacturer kept the cost of raw materials — cocoa powder, flour, sugar, gelatin and plastic resin for packaging — low last year despite the slide of the ringgit against the US dollar; any adverse impact was offset by the depressed commodity prices. 

“In the short term, we won’t be affected by the weak ringgit as we have already secured three-month contracts with our suppliers for most of the ingredients. But after that, our bottom line may suffer because we buy raw materials in US dollars. But things really depend on how much the ringgit fluctuates against the US dollar,” says Cocoaland finance director and executive director Tai Chun Wah.

That said, Cocoaland still expects to rake in higher revenue and profit for its financial year ending Dec 31, 2015 (FY2015) and FY2016.  

Its confidence could stem from its huge overseas market, which contributes about 60% to revenue, and where transactions are done in US, Hong Kong or Singapore dollars. Liew says China is Cocoaland’s largest overseas market at the present time, followed by the Middle East.  

Revenue from China has grown more than 30% in the last six months, remarks Tai. 

Net profit for the cumulative six months ended June 30 rose 98.2% from the previous corresponding period to RM15.56 million while revenue gained 4.1% to RM129.41 million. The company attributed the gains to higher sales, favourable foreign exchange rates and lower raw material cost.  

AmResearch says in a recent report that Cocoaland’s marginally higher revenue (+4%) was due to lower beverage product volume from its contract manufacturing business, which partially offset the higher demand for its gummy and snack products in both the domestic and export markets. 

Cocoaland is also looking to set up a sales representative office in Vietnam and Thailand in the next two years. At present, it sells its products in these markets through agents. The company is also in the midst of planning another factory in Rawang and sees the need to increase its capacity for gummy candy production by 2017.   

As at June 30, Cocoaland had net cash of RM61.5 million, which works out to 36 sen per share. Even after a recent three-for-one bonus issue and special dividend of 20 sen per share, the company can maintain its dividend payment if profits grow, says Liew.  

In its report, AmResearch says it expects an additional dividend of five sen per share in FY2015. Should that materialise, investors would get a total dividend of 27.5 sen per share in FY2015, which is equivalent to a yield of 9.4% based on Cocoaland’s closing price of RM2.92 last Thursday.

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Liew’s upbeat mood is despite a recently aborted takeover of the company by Hong Kong-based First Pacific Co Ltd. His family’s intention to sell the business has been known for some time in the market. 

Liew and his brothers hold 38.05% equity interest in Cocoaland through the family’s private vehicle Leverage Success Sdn Bhd. 

So far this year, Cocoaland has entertained three offers from external parties to take over the business, none of which panned out. In the latest unsuccessful takeover bid, First Pacific offered RM463.32 million or RM2.70 per Cocoaland share. 

The stock was trading above the offer price at RM2.94 at the time of writing last Thursday. It has gained about 100.7% from RM1.46 a year ago. 

Despite the failed attempts, Liew is still keen to sell the business. He says: “I’m an old man and I want to retire. There is no second generation to take up the business. I am still looking to sell the business and I’m exploring all viable options.”  

While the 68-year-old is keen to retire, it looks like the next suitor will have to match and even improve on the previous offers, apart from gaining the blessing of Cocoaland’s second largest shareholder — Fraser & Neave Holdings Bhd — which has a 27.19% stake.

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