This article first appeared in The Edge Malaysia Weekly on February 1, 2021 - February 7, 2021

LAST week, AFP reported that luxury chocolatier Godiva would be shutting its North American stores because of a steep fall in customer foot traffic as a result of the Covid-19 pandemic.

At the same time, a Bloomberg news report said that cocoa is piling up in warehouses in the Ivory Coast — the world’s largest producer of cocoa — as buyers refuse to pay up for beans amid the weak demand due to the pandemic.

Guan Chong Bhd managing director and CEO Brandon Tay Hoe Lian attributes the weaker demand mainly to lower discretionary consumer spending and travel bans, which have impacted the sale of premium and gift chocolates, especially in Europe.

Still, the cocoa grinder, which is in the midst of setting up a cocoa processing facility in the Ivory Coast, remains undeterred.

“There were delays in the construction of our new grinding facility in Ivory Coast from May to August last year due to movement controls and regulatory procedures in light of the Covid-19 pandemic situation, but it is now progressing smoothly and targeted for commissioning in the fourth quarter of this year,” Tay tells The Edge.

The group’s Ivory Coast plant is part of its long-term strategy to expand its global presence, adding to its cocoa grinding facilities in Pasir Gudang, Malaysia, in Batam, Indonesia and in Mannheim, Germany (through its acquisition of German industrial chocolate producer Schokinag Holding GMBH in January last year). The group’s annual grinding capacity is 257,000 tonnes and the commissioning of the Ivory Coast plant will boost capacity by a further 60,000 tonnes.

“Being part of a two-pronged strategy, our presence in Ivory Coast, the world’s largest cocoa producer, grants us reliable access to raw materials, and also supports our expansion into Europe, the world’s largest cocoa market,” says Tay.

Since last October, the implementation of a Living Income Differential (LID) by the world’s top two producing countries — Ivory Coast and Ghana — to alleviate the hardships suffered by farmers there has resulted in higher raw material costs for the Ivorian and Ghanaian bean. The premium charged is reported to be US$400 per tonne.

Reuters reported that the cocoa growers union of Ivory Coast are calling for a strike among its members in response to low cocoa prices and warehouse backlogs.

“The situation in Ivory Coast is not expected to pose a significant impact to our operations, as our raw materials are sourced from many parts of the world, including Indonesia, Papua New Guinea, Ecuador, Ghana and Nigeria.

“We are also less sensitive to changes in raw material prices, as being a cocoa processor, we serve as an intermediary between cocoa farmers and the chocolate manufacturers. We earn from the processing, while bean costs are mostly attributed to our customers,” says Tay.

The group, however, will need to bear the cost of the LID. Tay reiterates that the group sources its raw materials from many parts of the world and, hence, is not significantly impacted by the LID issues.

“As with any new policies or rules, the implementation of LID faces its own set of challenges, such as which part of the supply chain bears the costs, in addition to coping with lower cocoa beans demand due to the pandemic. As a cocoa processor, we will continue to monitor the outcome and impact of LID and work towards the industry objectives of the various stakeholders including farmers and brand owners,” he says.

Despite the implementation of the Move ment Control Order 2.0 in Malaysia and the lockdown in Germany to contain the spread of Covid-19, Guan Chong’s operations have not been too disrupted.

“Our Malaysia and Germany operations continue to operate smoothly while adhering to stringent health and safety protocols. We also have forward planning in production, which provides a buffer amid the uncertainties and enables us to meet delivery schedules consistently,” says Tay.

Nevertheless, in terms of sales, the group is expecting a minor decline in volume in addition to some margin pressures in thefirst quarter of financial year ending Dec 31, 2021 (1QFY2021), owing to the current market situation and competitive pricing.

“Orders from major customers have been slower as they adopt a more conservative approach in forecasts. This is expected to change as demand gradually returns alongside recovering economies as the pandemic situation is brought under control. We expect overall global demand to be adequately supported in 2021, as cocoa is widely consumed globally.

“We also expect a potentially stronger second half in Europe on recovering economies and vaccination rollout,” Tay says, adding that Guan Chong’s production capacity maintains a high utilisation rate of about 95%.

For the nine months ended Sept 30, 2020 (9MFY2020), Guan Chong’s net profit grew 0.7% year on year to RM175.92 million, on the back of a 24% increase in revenue to RM2.66 billion, thanks to contributions from its Schokinag acquisition.

In a Nov 25 note last year, AmInvestment Bank said it is expecting a depressed Ebitda (earnings before interest, taxes, depreciation and amortisation) yield for Guan Chong in the first half of FY2021 (1HFY2021) due to lacklustre demand as a result of the pandemic.

“We are also expecting a lower sales tonnage as a result of the low percentage of secured orders for FY2021. Nevertheless, we still like the group for its large growth potential from expansionary business policies and solid contributions from the Schokinag facility.

“The group is looking to a better 2HFY2021 as the global economy begins to fully recover from the pandemic and the cocoa butter ratio is anticipated to improve,” says AmInvestment.

The brokerage maintained a “buy” call on Guan Chong, with a fair value of RM4.05. Compared with a year ago, Guan Chong shares have declined 20% to close at RM2.51 last Wednesday, giving the company a market capitalisation of RM2.6 billion.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.