RHB Research has kept its earnings forecasts for the company.
PETALING JAYA: Guan Chong Bhd
is on track for a record-breaking year, with its second-quarter earnings for 2024 (2Q24) expected to remain in the RM80mil to RM100mil range, according to RHB Research.
The research house said the cocoa manufacturer’s performance is anticipated despite market expectations of a one-time profit boost in 1Q24, which was driven by inventory and hedging gains.
RHB Research believes that the resilience in Guan Chong’s earnings is underpinned by several key factors, including an uptrend in average selling prices (ASPs), higher revenue and favourable hedging positions.
“For the second half of 2024 (2H24), the higher ASP trend for its cocoa powder and cocoa butter products should translate to a stronger half-on-half performance,” the research firm noted.
RHB Research said Guan Chong’s capacity in the financial year ending Dec 31, 2024 (FY24) is well sold, with approximately 30% of its FY25 capacity already covered.
It believes that plant utilisation should be at an optimal level considering the sustained robust demand of cocoa ingredients although there could be some delays in the delivery of beans due to ongoing port-congestion issues.
“The majority of Guan Chong’s exports are on free-on-board terms, and we do not expect the higher freight to significantly put pressure on its ASPs amid the supply shortage situation,” it added.
RHB Research pointed out that the company sustaining a historic high combined ratio, with the butter ratio exceeding three times and the powder ratio over 0.7 times since March, is expected to result in much stronger earnings over the next six to nine months given forward selling.
“This will likely propel Guan Chong’s net profit to another new high in FY25 should more forward sales take place at an elevated ratio,” said RHB Research.
Citing Bloomberg estimates, RHB Research said cocoa bean prices are expected to moderate but remain elevated in 2H24 and 1H25, ranging between US$5,900 and US$8,500 per tonne, driven by sustained demand.
The research house said, beyond the current supply crunch, there could be a structural change in the cocoa industry.
“The combined ratio may stay elevated even if bean supply improves due to the new normal of the operating environment, which includes a heightened risk premium, additional hedging, and holding costs that grinders have to undertake given newfound volatility,” it added.
In terms of growth, RHB Research said Guan Chong has added 5,000 tonnes of capacity in its Ivory Coast plant and is looking to increase its capacity by 20,000 tonnes in Asia by 2H24, which will bring its total grinding capacity to 355,000 tonnes a year.
Additionally, Guan Chong is planning to install additional industrial chocolate capacity of 6,000 tonnes in Britain in 2H24, bringing total capacity there to 22,000 tonnes. This will be complemented by new liquor and butter-melting facilities.
The total capital expenditure for expansion is estimated to be around RM120mil.
RHB Research said it viewed the Ivory Coast and British capacity expansions as medium-term catalysts for the company.
The research outfit has kept its earnings forecasts unchanged and maintained a target price of RM5.10 per share on Guan Chong.
Key downside risks to its call include sharp fluctuations in raw material prices, weakening cocoa demand, a softening exchange rate, and counterparty risks.
