Guan Chong to see slow recovery, significant pickup expected after 2H14

KUCHING: Following Guan Chong Bhd’s (Guan Chong) less-than-stellar performance seen in the fourth quarter of 2013 (4Q13) which pulled its full-year earnings to just RM3.6 million (a 97 per cent year-on-year decline), the group will probably see a slow earnings recovery with any significant pickup signs to be felt only from the second half of 2014 (2H14) onwards.

HwangDBS Vickers Research Sdn Bhd (HwangDBS Vickers Research) in a note, said: “We gather that Guan Chong has already sold forward 65 per cent of its annual production capacity so far this year.

“Still, the group’s immediate focus is to clear its existing stock pile of cocoa powder (which has built up as a byproduct when it ground and sold more cocoa butter last year, thus causing its inventories to jump from RM524.6 million end of the financial year 2012 (FY12) to RM850 million end-FY13).

“This, in turn, could put pressures on its operating margins.”

As such, it viewed that although the worst may be over for Guan Chong, the group could see slower recovery this year.

To recap, Guan Chong’s performance was chiefly due to depressed selling prices (especially for cocoa powder due to an oversupply situation) resulting in a write-down in inventories of RM44 million in FY13, and foreign exchange (forex) losses of RM24 million arising from a weakening ringgit.

Overall, according to HwangDBS Vickers Research, the group’s sales tonnage decreased 5.5 per cent year-on-year (yo-y) last year.

“In terms of segmental breakdown: cocoa solids (powder and cake) contributed 36.6 per cent of FY13’s revenue of RM1.4 billion as its sales tonnage (a 16.4 per cent y-o-y drop) and average selling prices (average selling price was down 28.1 per cent y-o-y) plunged. Cocoa butter accounted for 50.1 per cent of overall revenue after registering higher sales tonnage (a 5.6 per cent y-o-y increase) and average selling price (a 38.7 per cent increase), and cocoa liquor’s sales and other businesses made up the balance 13.3 per cent of revenue,” it explained.

It added, based on total output of 169,000 metric tonnes, the group recorded an average capacity utilisation rate of 85 per cent in FY13 at both its plants in Pasir Gudang and Batam (which have a combined annual production capacity of 200,000 metric tonnes).

Going forward, the research firm noted that management anticipates that butter ratio could soften from its recent high while cocoa powder price may climb following last year’s sharp decline.

“Whether there will be further inventory write-downs and forex losses will obviously depend on future movements of cocoa prices and exchange rates, which have somewhat stabilised at this juncture,” it said.

Overall, HwangDBS Vickers Research said that until there are visible signs of a sustainable earnings rebound, it retained its ‘fully valued’ call on the stock with a target price of RM1.15 per share (pegged to fully diluted price earnings of 7.5-folds on FY14 earnings).