KUALA LUMPUR (Dec 24): Guan Chong Bhd (GCB) shares gained 1.99% or 6 sen to RM3.07 in morning trades today following a positive analyst outlook on the stock.

In a note today, RHB Investment Bank Bhd Research said it remains upbeat on GCB's prospects post meeting with the management on its recent Schokinag acquisition.

“The vertical acquisition seems to be a perfect fit for GCB to tap into the EU market as well as minimise the risk of underutilising the upcoming Ivory Coast cocoa processing plant. Upon completion of the acquisition, GCB plans to ramp up production by improving the utilisation rate and prioritising gaining market share,” it said.

The research house has maintained its “Buy” rating on GCB at RM3.01 with an unchanged target price (TP) of RM3.45 and said the stock remains undervalued, trading at just 12.9 times price-to-earnings (P/E) versus its local indirect peer average of 16-17 times.

It also said GCB’s earnings growth should be sustained on the back of growing demand for cocoa-based products globally, and wide customer network.

“The plant is currently running at only 67% utilisation rate, and if the transition goes smoothly, it intends to increase the industrial chocolate production capacity to 120,000 tonnes pa (from 90,000 tonnes pa).

“The ramp-up in capacity utilisation and lower raw material costs will help boost future earnings, in our view,” it added.

RHB Investment Bank Bhd Research said Schokinag’s key management after the acquisition would be retained to ensure continuity of business operations.

Well-experienced in the chocolate manufacturing business and familiar with local industry landscape, GCB believes that the current team is the right fit for the job, added the research house.

The research house said Schokinag has a low customer concentration risk with its top 10 customers contributing only c.8% of total sales. Also, GCB is likely to tap into a new pool of clientele through Schokinag, further expand its distribution network.

RHB Research said it gathered that Schokinag is profitable and operating in a net cash position.

“Based on the information from the vendor, Schokinag had an annual turnover of EUR175 million. Management will disclose further details once the acquisition is completed in the first quarter of 2020 (1Q20).

“However, we understand that the cost would have been much higher had it embarked on a greenfield expansion of such scale.

“We make no changes to our forecasts, pending further details,” it said.

At 10:33am, GCB shares were traded at RM3.07 and saw some 0.64 million shares done, valuing it at RM3.04 billion.