Bloomberg: GUAN MK Reuters: GNCH.KL Malaysia Equity Research HOLD RM.78.78 KLCI :,674.4 Price Target : -Month RM.9 Reason for Report : Company update Potential Catalyst: Higher sales and cocoa bean prices DBSV vs Consensus: Lower than consensus due to conservative assumptions Analyst Kevin WONG +63 7 kevin@hwangdbsvickers.com.my Price Relative..7..7 R M R e la t i v e In d e x. 5 M a r - 9 M a r - M a r - M a r - M a r - 3 G u a n C h o n g ( L H S ) R e la t iv e K L C I IN D E X ( R H S ) Forecasts and Valuation Research PP 758//(33) FY Dec (RM m) A 3F 4F 5F Revenue,44,74,87,983 EBITDA 8 9 5 Pre-tax Profit 53 66 79 93 Net Profit 9 8 39 49 Net Pft (Pre Ex.) 9 8 39 49 EPS (sen) 4.8 6.7 8.9 3. EPS Pre Ex. (sen) 4.8 6.7 8.9 3. EPS Gth (%) (6) 8 8 8 EPS Gth Pre Ex (%) (6) 8 8 8 Diluted EPS (sen).5 3. 5. 6.8 Net DPS (sen) 4.5 6. 6.5 7. BV Per Share (sen) 7.3 9.. 34. PE (X) 7. 6.7 6. 5.8 PE Pre Ex. (X) 7. 6.7 6. 5.8 P/Cash Flow (X) nm..5 6.9 EV/EBITDA (X) 7.9 7.4 6.8 5.9 Net Div Yield (%).5 3.4 3.6 3.9 P/Book Value (X).5.9.6.3 Net Debt/Equity (X).6...7 ROAE (%) 38.8 3.5 8.3 5.3 Earnings Rev (%):.7 3.7 3.7 Consensus EPS (sen sen): 8.3 7.5 3. Other Broker Recs: B: S: H: ICB Industry : Consumer Goods ICB Sector: Food Producers Principal Business: Manufactures and sells cocoa ingredients; cocoa butter, cake, liquor and powder. Source of all data: Company, DBS Vickers, Bloomberg Finance L.P 4 3 5 3 5 5 Apr 3 Refer to important disclosures at the end of this report No re-rating catalyst in sight yet Lower valuations compared to benchmarks set by Petra Foods cocoa business and JB Foods may limit share price downside Re-rating only on stronger earnings growth and measures to unlock value Maintain HOLD and RM.9 TP, pegged to 7.5x FY4FD EPS, near historical high Latest pricing benchmarks. s (GC) current market value implies 7x P/E, 8x FY EV/EBITDA, and USD.6k/MT capacity. This is cheap compared with: (a) the USD95m Petra Foods got from selling its cocoa ingredients division to Barry Callebaut (BC), which implies.5x FYF EV/EBITDA and USD.3k/MT capacity; and (b) JB Foods, which share price has risen 3% since it announced new shares placement on 3 January 3, despite its smaller market cap of S$6m and annual capacity (85k MT), and poorer earnings and valuation metrics (FY net profit S$6m; 9x EV/EBITDA; 4x P/E). Brighter H outlook. BC s decision to acquire Petra Foods cocoa business: (a) indicates vast demand potential in Asia (where GC has a presence); and (b) could benefit GC (4 th biggest post-acquisition) as major customers may diversify their supply chain in the face of industry consolidation. Meanwhile, H3 earnings visibility has improved as sales orders have been picking up on the back of rising (cocoa butter) selling prices. Offering 9.5% total potential return. We tweaked our -4F earnings 3-4% higher to factor in lower effective tax rate of % (from 4%) but offset by a slight reduction in -4F s EBITDA margins by.6%. Although the valuation disparity may limit downside, we believe a re-rating for GC could only happen on the back of visible strong earnings growth and corporate development to unlock its underlying value. Maintain HOLD with a RM.9 TP pegged to 7.5x (near its historical high) FY4F FD EPS. At A Glance Issued Capital (m shrs) 476 Mkt. Cap (RMm/US$m) 853 / 76 Major Shareholders Resources Sdn Bhd 5.4 LTAT (%) 5. Free Float (%) 3. Avg. Daily Vol.( ) 8 Refer to important disclosures at the end of this report
Barry Callebaut acquires Petra Foods cocoa business Fig. : Post-consolidation capacities Background. On December, Barry Callebaut (BC) announced its plan to acquire Petra Foods entire cocoa ingredients division for USD95m (c.rm3.bn) on a debt-free basis. The deal is expected to be completed before the May- August 3 deadline(s), depending on various regulatory approvals. Briefly, BC (based in Zurich and listed on the Swiss Exchange) is among the world s top manufacturers of cocoa products. It operates 45 production facilities in 3 countries. Its two global brands are Callebaut and Cacao Barry. Meanwhile, Petra Foods has decided to unlock the value of its cocoa ingredients business which profits were declining (while keeping its branded consumer products division). After taking over of Petra Foods 45k MT installed annual grinding capacity, BC s total capacity would jump from 7k MT to almost.m MT, turning it into the world s largest in the cocoa grinding industry (Figure ). Asian growth story. The acquisition is a strategic move by BC to expand into the fast-growing Asian cocoa market. It would immediately boost the group s sales volume by 65% (to almost /3 of overall sales volume), and turn it into a leading cocoa producer to tap on the demand growth potential in Asia. Back in 8, BC had made a move to gain a foothold in Asia when it acquired KL Kepong s cocoa division, KL-Kepong Cocoa Products Sdn Bhd (KLKCP), for RM7.3m [comprising RM53.6m (6% stake) in 8 and RM7.7m (4% stake) in ]. KLKCP booked c.rm5m sales in 7 driven by an estimated annual capacity of 7k MT for cocoa products and k MT for chocolate compounds in Malaysia. Source: Barry Callebaut Page
Impact on. BC s expansion into Asia is a sign of the strong demand for cocoa ingredients in this region. And GC, as the 4 th largest cocoa grinder in the world with an annual capacity of k MT (Fig. ) following BC s acquisition, will also be able to tap on the exciting demand growth for cocoa ingredients, given its niche in this region. It will likely be business as usual for GC for the time being as BC would need time to fully integrate Petra Foods facilities and improve operational efficiencies. In the longer run, GC could benefit from spillover orders as major clients may buy more cocoa ingredients from grinders like GC, in order to diversify supply risks following the merger of BC s and Petra Foods cocoa business. This assumes that BC after consolidating its customer portfolios in Indonesia, Thailand, Brazil, Mexico, Germany and Malaysia to derive better economies of scale would not steal market shares from the smaller industry players by pursuing aggressive pricing policy. But following BC s move, there may be more M&A activities particularly by the other top players like Cargill and Archer Daniels Midland (ADM), in order to consolidate their positions and: i) remain competitive in the business; ii) capture larger market shares; and iii) diversify business and geographical risks. Setting new pricing benchmark. More importantly, the acquisition has provided interesting insights into industry pricing yardsticks. The USD95m price tag effectively implies: (a).5x EV/EBITDA based on DBS FYF EBITDA of USD4.m for Petra Foods cocoa ingredient division; and (b) USD.3k per MT of capacity. Fig. : GC vs. Petra Foods - comparison () GC PF* Installed capacity (k MT). 45.^ Sales volume (k MT) 68. 5.6^ Revenue (USDm) 593,5 EBITDA (USDm) 6 4 EBITDA margin (%). 3.3 EBITDA yield (USD/MT) 39 4 EV/EBITDA (x) 6.7 3.5 Price RM.79 SGD4.6 P/Diluted EPS (x) 6.7 36.5 P/BVPS (x).9 5.8 Note: Based on 8 March 3 s closing prices * Based on Petra Food s Cocoa Ingredient division, except for pricerelated valuations which are based on group earnings ^ Assuming same as FY annualised figures JB Foods: case study. GC s valuation is also undemanding compared with JB Foods, a Singapore-listed cocoa processor that is based in Johor, Malaysia. After making a dismal debut - its share price has been languishing at close to the IPO price of S$.3 since listing on June up to January 3 the stock had surged to a high of S$.5 on February following the announcement of the placement of 8m new shares at S$.7 apiece (Fig. 3). Fig. 3: JB Foods share price.6.5.4.3. In contrast, GC is currently trading at a deep discount at: (a) FY EV/EBITDA ratio of 8x; and (b) USD.6k per MT. A comparison of other financial and operating metrics between GC and PF s cocoa grinding business is captured in Fig.... -Jul- 9-Aug- 8-Sep- 8-Oct- 7-Nov- 7-Dec- 6-Jan-3 5-Feb-3 7-Mar-3 At its closing price of S$.45 yesterday, the shares are trading at: (a) ballpark 9x EV/EBITDA ratio; (b) USD,5/MT of capacity (based on its end-fy3 capacity of 85k MT); and (c) 4x FY3 P/E. By comparison, GC seems cheap considering that it is bigger in terms of: (a) market cap of RM853m (vs S$m/RM56m); (b) plant capacity of k MT p.a (vs 85k MT); (c) sales of RM,74m (vs S$69m/RM679m); and (d) net profit of RM8m (+8% y-o-y; vs S$5m/RM38m). Fig. 4 summarises these comparisons. Page 3
Fig. 4: JB Foods - earnings and forecasts (FYE Dec) (RMm) FY FY FY FY4F Revenue 54. 69.6 583. 679. 73.9 COGs (44.9) (65.) (5.6) (66.3) (65.5) Gross Profit 6.3 85.5 6.5 7.8 78.3 Other inc 6.3 3.4 3. 3. 3. Other exp (3.) (9.) (8.6) (.7) (3.4) EBIT 55.6 69.8 46.9 54. 58. Finance cost (.7) (.7) (3.3) (3.3) (3.3) PBT 54. 67. 43.6 5.7 54.6 Tax (5.8) (6.) (4.4) (.7) (3.7) PAT 48. 5. 39. 38. 4. Gross margin.4%.4%.7%.7%.7% EBIT margin.%.% 8.% 8.% 7.9% PBT margin.7% 9.7% 7.5% 7.5% 7.5% Fig. 5: JB Foods - operating statistics (FYE Dec) FY FY FY FY4F Capacity 6, 6, 7,5 85, 85, Utilisation 7% % 85% 8% 8% Production 43,96 6,39 6,65 68, 69,7 Revenue Cocoa powder 3.6 358. 39. 347.9 374.4 Cocoa butter 6.8 8.8 44.4 75. 96. Others.8 49.7 9.6 56. 6.3 Total 54. 69.6 583. 679. 73.9 Note: Capacity, production and volume denoted in MT and Earnings prospects FY briefing: key takeaways. At the recent post-result briefing, GC revealed the following: (a) it ground 48.6k MT of beans in 4Q, taking total grinding volume to 59.5k MT for the full year (FY:6.6k MT); and (b) sold 34.k MT of ingredients in FY (FY: 8.7k MT). Despite the higher revenue last year (up 4% to RM.44bn), the Group recorded marginal EBITDA growth of 8% to RM8.5m because of lower selling prices (-5% y-o-y) as a result of excess capacity in Europe. The average EBITDA yield fell to RM,6.4/MT (FY: RM,33.9/MT) while operating margin was almost unchanged at.5% (vs.3% in FY). Meanwhile, FY net profit fell 6% y-o-y due to a higher effective tax rate (% vs. 5% in FY) in the absence of export tax incentives (amounting to RM9.m in FY). Ready to tap on expanded capacity. GC raised total installed annual capacity to k MT when it installed the nd line at the Batam plant in June. It intends to tap on the rising demand for cocoa ingredients and ramp up production going forward. We assumed only 8% average utilisation rate for FY3 and 84% for FY4 (vs 84% last year) because the new capacity will be ramped up gradually. Also, after buying the remaining 5% stake in US-based Carlyle Cocoa Co. for USD3.6m in January 3, GC plans to expand its presence in the US by doubling Carlyle s existing 6k MT capacity for cake-crushing operations. Better earnings visibility in H. GC had held back some sales orders in (to protect margins) amid depressed butter ratio and cocoa prices (which partly dampened FY results). But it has started to accept more sales contracts since H in view of better pricing (butter ratio has recovered from.93 to >.7; see Fig. 6). The earnings impact is expected to be felt mostly from H3 as these forward orders will be delivered progressively within 6- months. We have fine-tuned our financial assumptions: (a) higher revenue of RM.7bn in FY3 (+%) and RM.87bn in FY4 (+8%) supported by rising output; (b) slightly weaker operating margins of.% in FY3 and.% in FY4 (vs.5% in FY) amid competitive selling prices; and (c) -4F net profits of RM8m (+8% y-o-y) and RM39m (+8% y-o-y), respectively. Fig. 6: Cocoa bean price and butter ratio 4,5 4, 3,5 3,,5,,5, Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan- Cocoa Bean Price (USD/MT;LHS) Jul- Jan- Jul- Jan- Butter ratio (RHS) Jul- Jan-3 3..5..5..5. Page 4
Valuation Maintain Hold. Our TP is intact at RM.9, pegged to 7.5x FY4F FD EPS. Downside is limited by net dividend yield of 3.4%, the current low P/E valuation (6.x FY4F earnings), and valuation merits vs Petra Foods cocoa business and JB Foods. Fig. 7a: PE Band Fig.. 7b: 7 PBV Band PE (x) 9. 8. 7. 6. 5. + SD + SD Mean - SD - SD PBV (x) 3..9.7.5.3..9 + SD + SD Mean - SD 4..7 - SD 3..5 Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan-3 Mar-3 Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan-3 Mar-3 Fig.. 8: 8 : Peer valuation Company FYE Price (local) Mkt Cap (US$m) FYA FYA PE FY4F Div Yield (%) CAGR FY- FYA 4F Net gearing ROE (x) (%) Dec.78 75 6.8 7. 6.7 6..5 3.4 3.3%. 33 JB Foods* Dec.45 7.3 3.8 4.3 3.3.6.6-8.%.6 Average 8.6.5.5 9.8 Fig. 9: : Peer comparison Company Revenue (RM ( RMm) Pretax margin (%) Net profit (RM ( RMm) FYA FYA FY4F,38.8,44.5,74.3,869.5.9.6 9.6 9.6 5.8 8.8 8.3 38.6 JB Foods* 69.6 583. 679. 73.9 9.7 7.5 7.5 7.5 5. 39. 38. 4. * DBS Vickers estimates FYA FYA FY4F FYA FYA FY4F Page 5
Key Assumptions FY Dec A A 3F 4F 5F EBITDA yield (sales),439.7,46.,337.4,36.4,47.8 Production capacity 3,. 75,.,.,.,. Sales tonnage 8,. 8,. 4,848. 5,4. 55,5. Cocoa bean price 3,357.,635.3,898.8 3,43.8 3,35. Butter ratio.7..3.3.3 Capturing full capacity by end-fy3 Segmental Breakdown FY Dec A A 3F 4F 5F Revenues (RM m) Cocoa Butter 73 486 594 665 78 Cocoa Cake/ Powder 69 98,99,7,3 Others 4 (5) 3 33 34 Total,383,44,74,87,983 Income Statement (RM m) FY Dec A A 3F 4F 5F Revenue,383,44,74,87,983 Cost of Goods Sold (,6) (,99) (,58) (,655) (,75) Gross Profit 57 43 96 5 33 Other Opng (Exp)/Inc () (7) (3) Operating Profit 57 65 75 88 3 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (6) () (9) (9) () Exceptional Gain/(Loss) Pre-tax Profit 5 53 66 79 93 Tax (3) (34) (36) (39) (4) Minority Interest () () () () () Preference Dividend Net Profit 6 9 8 39 49 Net Profit before Except. 6 9 8 39 49 EBITDA 7 8 9 5 Growth Revenue Gth (%) 8.3 4. 9.6 8.4 6. EBITDA Gth (%) 37. 6.8 5. 7. 7.8 Opg Profit Gth (%) 34.4 5.6 5.7 7. 8. Net Profit Gth (%) 5.6 (5.6) 8. 8. 7.8 Margins & Ratio Gross Margins (%).3 9.9.4.5.7 Opg Profit Margin (%).3.5... Net Profit Margin (%) 9. 8. 7.4 7.4 7.5 ROAE (%) 56.3 38.8 3.5 8.3 5.3 ROA (%) 8..6.6.3. ROCE (%) 3.6 5. 3. 3..8 Div Payout Ratio (%).5 8..5.5.5 Net Interest Cover (x) 5.3 3.6 9..9.5 Margins Trend 3.%.%.%.% 9.% 8.% 7.% A A 3F 4F 5F Operating Margin % Net Income Margin % Margins are expected to improve gradually Page 6
Quarterly / Interim Income Statement (RM m) FY Dec 4Q Q Q 3Q 4Q Revenue Trend 45 4 5% % Revenue 39 354 33 348 46 Other Oper. (Exp)/Inc (347) (39) (7) (3) (387) Operating Profit 45 45 43 38 39 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (3) (3) (3) () (4) Exceptional Gain/(Loss) Pre-tax Profit 4 43 4 36 34 Tax (6) () (5) (9) (9) Minority Interest () Net Profit 35 3 35 7 5 Net profit bef Except. 35 3 35 7 5 EBITDA 48 49 47 43 43 35 3 5 5 5 Q 3 Q Q 4 Revenue Q Q 3 Q Q Q Q 4 3 Revenue Growth %(QoQ) Q 4 5% % 5% % -5% -% -5% -% Growth Revenue Gth (%) 7. (9.5) (.7).4. EBITDA Gth (%) 4..4 (3.) (9.5) (.3) Opg Profit Gth (%) 6.6.9 (4.4) (.6).9 Net Profit Gth (%) 36.4 (.5).8 (.3) (9.4) Margins Opg Profit Margins (%).5.8 3.8. 9. Net Profit Margins (%) 9. 8.8.3 7.9 5.8 Due to lower ASP and higher expenses Balance Sheet (RM m) FY Dec A A 3F 4F 5F Net Fixed Assets 37 3 3 39 76 Invts in Associates & JVs Other LT Assets 4 6 6 6 6 Cash & ST Invts 3 5 79 94 9 Inventory 466 53 635 689 73 Debtors 5 5 6 67 83 Other Current Assets 3 3 3 3 Total Assets 9,5,8,398,5 Asset Breakdown (3) Debtors - 7.4% Net Fixed Assets - 5.% Assocs'/JVs -.% ST Debt 48 5 5 5 5 Other Current Liab 79 55 5 36 LT Debt 9 3 3 3 3 Other LT Liabilities 4 8 3 6 Shareholder s Equity 65 347 44 538 643 Minority Interests 6 4 5 6 7 Total Cap. & Liab. 9,5,8,398,5 Inventory - 5.% Bank, Cash and Liquid Assets - 6.4% Non-Cash Wkg. Capital 458 64 659 747 79 Net Cash/(Debt) (43) (573) (546) (53) (433) Debtors Turn (avg days) 4. 46. 45.5 47. 5.7 Creditors Turn (avg days) 33.3 4. 37. 38.7 39.3 Inventory Turn (avg days) 93.7 4.9 4.8 47.5 49.5 Asset Turnover (x)..4.4.4.4 Current Ratio (x)...3.4.6 Quick Ratio (x).3.4.4.5.6 Net Debt/Equity (X).6.6...7 Net Debt/Equity ex MI (X).6.7...7 Capex to Debt (%) 4.5 6..4.4 (.4) Z-Score (X) 3.3 3.3 3.4 3.5 3.6 Page 7
Cash Flow Statement (RM m) FY Dec A A 3F 4F 5F Capital Expenditure Pre-Tax Profit 5 53 66 79 93 Dep. & Amort. 3 6 6 7 8 Tax Paid (4) (3) (34) (36) (39) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (38) (48) (78) (9) (47) Other Operating CF 3 Net Operating CF (85) () 7 69 4 Capital Exp.(net) (7) () (5) (5) 5 Other Invts.(net) (4) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (7) (4) (5) (5) 5 Div Paid (6) (5) (9) (38) (4) Chg in Gross Debt 5 9 Capital Issues Other Financing CF (6) Net Financing CF 93 4 (9) (38) (4) Currency Adjustments 4 Chg in Cash 8 7 5 98 Opg CFPS (sen) 3.9 3.6 3.9 33. 35.7 Free CFPS (sen) (4.) (.).6. 9. 8 6 4 A A 3F 4F 5F Capital Expenditure (-) Lower capex post- Batam plant expansion Target Price & Ratings History. RM...9.8.7.6 4 3 5 6 7 8 S.No. Da te Closing Ta rge t Price Price Ra ting : Apr.89 3. Buy : 4 May.8.75 Buy 3: Aug.97 3. Hold 4: 3 Aug.5 3. Hold 5: 9 Nov.94. Hold 6: 6 Nov.89.95 Hold 7: 8 Feb 3.74.9 Hold 8: 7 Mar 3.75.9 Hold.5 Mar- May- Jul- Sep- Nov- Jan-3 Mar-3 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Vickers Page 8
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