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Friday, December 28, 2012

Guan Chong sales set to rise


Trading Buy
Target Price: RM2.00
GUAN Chong posted a first nine-month of 2012 net profit of RM94.3mil, which was below our expectations and the consensus estimate, making up only 66.4% and 70.3% of the two numbers respectively.
The third quarter net profit improved 5.7% year-on-year to RM27.4mil due to lower costs.
Meanwhile, the overall nine-month net profit registered a lower growth of 3.9% year-on-year. This was mainly due to the lower average selling price of cocoa despite a 12.5% increase in the sales volume.
However, the impact was cushioned by lower input costs, resulting in a year-on-year improved EBITDA margin of 13.5%, compared with 12% a year earlier.
A 2 sen net dividend per share was declared in the third quarter, bringing the total year-to-date dividend to 6.7 sen (adjusted).
Since our first report on Sept 11, the share price of Guan Chong has fallen by 23.2%. We believe this was partly due to the news that it would not proceed with its secondary listing on the Singapore Exchange Securities Trading Ltd as well as the depressed cocoa prices, which dampened the industry's outlook.
Nevertheless, we believe the sales of cocoa butter will gradually pick up to help fill the new additional total capacity of 200,000 tonnes a year next year.
With the double-digit sales volume growth registered to date and the additional capacity after the recent expansion, we believe the sales volume will rise to mitigate the impact of unfavourable cocoa prices and tap into a growing demand for cocoa-based food and beverage (F&B) products in the emerging markets when its traditional markets slow down.
Although the nine-month results usually make up 55% to 73% of the full-year results in the past years, we still prefer a conservative stance on the company due to the sluggish cocoa prices. Thus, we are cutting our earnings estimates for financial year 2012 estimated (FY12E) by 10.3% to RM127.4mil while generally maintaining our FY13E estimate at RM144.3mil on the back of a better outlook for next year.
The stock is currently trading at 6 times financial year 2011 price-earnings ratio (PER), 6 times FY12E PER and 5.3 times FY13E PER, which are undemanding compared with its five-year average PER of 6.9 times and the small cap F&B consumer stocks' trailling at current 12-month PER of 10.3 times.
In line with our earnings estimates adjustments, we have downgraded our target price on Guan Chong to RM2 from RM2.40 previously based on a conservative Fwd PER of 6.9 times (8 times PER previously) over FY13E earnings per share.

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