KUALA LUMPUR: Guan Chong Bhd’s cocoa plants are running at an average utilisation rate of 90 per cent during the Movement Control Order (MCO), with only minor disruptions to operations, RHB Research said.
The firm said while global demand for cocoa products may ease due to Covid-19, this would be partially offset by the drop in supply, as a result of operational disruptions faced by other cocoa grinders in the region.
Despite decreasing its operating workforce by 50 per cent presently, high automation had helped Guan Chong to run production at almost full capacity, RHB Research said.
“The Schokinag plant is currently running as per normal as Germany considers chocolate manufacturing an essential business,” it said in a report today.
RHB Research expects Guan Chong’s financial year 2020 earnings before interest, tax, depreciation, and amortisation margins to be slightly narrower.
This will be due to lower production tonnage in first half of 2020 given the MCO and pressure from the sharp increase in bean prices since end 2019.
This, in turn, was due to the unresolved living income differential (LID) situation.
However, it said the terminal price had retraced sharply recently, and Guan Chong was stocking up inventory to minimise the risk of supply disruption and sudden increases in 1.3 bean prices due to the LID.
“Its current inventory level is sufficient for three to four months. The company is avoiding Ivory Coast and Ghana beans for the time being, unless customers are willing to bear the LID premium.
“Guan Chong has, so far, locked in 85 to 90 per cent of its 2020 sales and 20 per cent of 2021 sales,” it said.
RHB Research cut its FY2020-2022 earnings by 14 per cent to reflect lower margins and production, as well as the delay in the commissioning of its Ivory Coast plant.
The firm maintained its “buy” call on Guan Chong with a lower target price of RM 3.35 from RM3.45.
“Despite the pandemic affecting the broad economy, the demand for cocoa products remains healthy, and Guan Chong is still running with little disruption.
“Its new ventures into the Ivory Coast and Europe would be the next future earnings drivers. Key risks to our call include cocoa bean price volatility and prolonged uncertainty over the LID issue,” it said.