KUALA LUMPUR: Guan Chong Bhd's purchase of a 25 per cent stake in Transcao Coté d'Ivoire (CI) could provide the company with swift access to increased capacity at minimal capital expenditure, aiding in securing a stable bean supply to tap into the current market.
Yesterday, Guan Chong entered into an agreement with Ivory Coast's Conseil du Café-Cacao (CCC) to acquire a 25 per cent stake in CI.
RHB Investment Bank Bhd (RHB Research) said the deal gives Guan Chong quick access to additional grinding capacity (currently 335,000 metric tonne (MT)) at minimal capex to capture more sales and market share amidst the current favourable market conditions, with a synergistic partnership.
"An established partnership with the local authority would also help it secure the highly sought-after high-quality beans from Ivory Coast, especially EU Deforestation Regulation (EUDR)-compliant beans, which comes into effect on Dec 30, 2024 (with a potential 12-month phasing-in period)," it added.
RHB Research said while information remains scarce at the moment as the final agreement has yet to be ironed out, the venture is expected to be earnings accretive in financial year 2025 (FY25) given the minimal additional resources required, due to the close proximity of the company's operations in Ivory Coast.
"Investment quantum is likely to be below the 5 per cent percentage ratio threshold," it said.
The investment bank has maintained its 'Buy' call on the company, with a target price of RM5.10.
Meanwhile, RHB Research said the current robust cocoa market conditions are expected to continue in view of the ongoing supply shortage and sustained strong demand, resulting in the prolonged elevated combined ratio.
"We believe these will catalyse Guan Chong's earnings growth at least in the next year, given the forward selling mechanism."Furthermore, there could be a structural change that may extend the elevated combined ratio."This is due to the new normal in the operating environment of supply shortage, additional hedging and holding costs, as well as the heightened risk premium (volatility) that grinders have to undertake," it added.
The firm said a further upside could stem from production growth in its Ivory Coast (taxfree) and UK plants, as well as the new proposed joint venture with CCC.