RHB Research is positive about the mutually beneficial venture.
PETALING JAYA: Guan Chong Bhd
will likely see a boost in its earnings next year if its proposed acquisition of a 25% stake in a cocoa processing, manufacturing and distribution company in Ivory Coast is finalised.
This is because the deal would provide the cocoa and chocolate confectionery company with quick access to additional grinding capacity and secure premium-quality cocoa beans with minimal incremental investment.
Guan Chong has announced that its subsidiary, GB Cocoa Singapore Pte Ltd, had signed a memorandum of understanding with with Ivory Coast’s Conseil du Cafe-Cacao (CCC) to acquire a 25% stake in Transcao Cote d’Ivoire (CI).
RHB Research is positive about the mutually beneficial venture, which would give Guan Chong quick access to additional capacity at minimal capital expenditure, helping it secure bean supply to capture the current robust market, while CCC would benefit from production efficiency and Guan Chong’s established international sales channel.
While information about the deal remained scarce at the moment as the final agreement was yet to be ironed out, RHB Research is optimistic about the positive impact from the deal.
“The venture is expected to be earnings accretive in 2025, given the minimal additional resources required as Guan Chong’s operations in Ivory Coast are in close proximity. “Investment quantum is likely to be below the 5% percentage ratio threshold,” RHB Research said in its report.
It noted that an established partnership with CCC – or Ivory Coast’s Coffee and Cocoa Council, the government body responsible for the regulation and development of the cocoa and coffee sectors – would also help Guan Chong secure the highly sought-after quality beans from Ivory Coast, especially the European Union (EU) Deforestation Regulation (EUDR)-compliant beans.
The EUDR will come into effect on Dec 30, 2024, with a potential 12-month phasing-in period. RHB Research maintained its “buy” call on Guan Chong with an unchanged target price of RM5.10 a share.
“Current robust cocoa market conditions are anticipated to continue in view of the ongoing supply shortage and sustained strong demand, resulting in the prolonged elevated combined ratio.
“We believe these will catalyse Guan Chong’s earnings growth at least in the next year, given the forward selling mechanism,” it explained.
“Furthermore, there could be a structural change that may extend the elevated combined ratio. This is due to the new normal in the operating environment of supply shortage, additional hedging and holding costs, as well as the heightened risk premium (volatility) that grinders have to undertake,” it added.
Further upside could stem from production growth in its Ivory Coast and UK plants, as well as the new proposed joint venture with CCC, RHB Research noted.
