‘Buy’ recommendation on Guan Chong
RHB Investment Bank Bhd (RHB Research) remains bullish on Guan Chong Bhd’s performance in its financial year 2024, driven by margin expansion.
The research firm has maintained its “buy” call on the stock with a higher target price of RM3.30.
RHB Research said there was substantial upside to Guan Chong’s share price as the market had underestimated sustainable earnings potential from the company’ newfound pricing power.
This will be bolstered by limited capacity and resilient demand despite prolonged elevated cocoa bean price.
“These unprecedented conditions have provided a fertile ground for Guan Chong to gain market share and extend its reach.”
RHB Research said contrary to unsubstantiated thesis in the market, Guan Chong stood to benefit from more than just a one-off advantage stemming from securing low raw material costs early.
Rather, it said the most important profitability metrics of a grinder relied on the combined ratio (which is a key driver in the average selling price and revenue), among others.
“In normal circumstances, the butter and solids ratios tend to balance each other in an uptrending and downtrending cocoa bean price environment, leading to a rather neutral impact on profitability.”
However, it noted that as both ratios were at a historic high given the supply shortage (in both bean and grinding) and sustained demand, Guan Chong had benefited since January.
These should substantially expand grinding margins and fuel robust earnings potential in the second half of financial year 2024 and into financial year 2025, supported by forward selling mechanisms.
“Bean deficit in the 2023-2024 season, affected by adverse weather, pod disease and swollen shoot virus coupled with shortage at chocolate makers, shifted the dynamics to a seller’s market and it should remain in the current mid-crop season (April-September) where beans are hard to come by,” added RHB Research.