KUALA LUMPUR (Sept 6): Guan Chong Bhd’s earnings are expected to be supported by a forward-selling mechanism, strong sales channel and multinational clientele.

In a note on Wednesday, RHB Research stated that in the second half 2023 (2H2023), butter products are expected to be less affected by the high bean price as it was well covered by the lower raw material prices secured earlier.

“Slower re-pricing of powder average selling price (ASP) may compress the near-term margin, but we expect the Ivory Coast plant to support the 2H bottomline once the exports start to flow and the market stabilises. The Schokinag operations should chalk a record high performance from lower input costs and higher ASP,” the research outfit said.

On strategy, the management said it is also not in a hurry to sell its forward capacity at a lower ratio while the majority of the customers are also delaying purchases.

“Management is of the view that the bean price volatility should subside once supply-demand reaches equilibrium and/or market absorbs the new price level,” RHB said, adding all the commodities hedging losses booked-in earlier would translate into higher revenue and margin going forward

The research firm revised its target price (TP) to RM3.11 based on a lower financial year 2024 (FY2024) price-earnings ratio of 15 times (from 17 times).

“Our TP includes 0% ESG (environmental, social and governance) premium/discount. We believe the current uncertainties in the chocolate industry provide a good entry level to Guan [Chong]’s unique exposure to global consumer footprint at below-mean valuation,” the firm said.

RHB added downside risks to earnings are sharp raw material price fluctuations, weakening cocoa demand, and risks on its expansion plans.

The world’s fourth largest cocoa grinder reported 1H2023 core earnings of RM51.9 million, dragged by the huge commodity future losses and additional write-off (prudent measure) on surging cocoa bean prices and higher interest costs.

At the time of writing, Guan Chong shares were traded unchanged at RM2.07, valuing the group at RM2.43 billion.