KUALA LUMPUR: RHB Research remains bullish on Guan Chong Bhd's anticipated robust performance in financial year 2024 (FY24), driven by margin expansion.
Hence, the firm set a new target price of RM3.30 from RM2.70 previously, while maintaining its "Buy" call.
RHB Research said there is still substantial upside to the share price as the market has underestimated sustainable earnings potential from Guan Chong's newfound pricing power.
This will be bolstered by limited capacity and resilient demand despite prolonged elevated cocoa bean prices.
"These unprecedented conditions have provided a fertile ground for Guan Chong to gain market share and extend its reach," it added.
RHB Research said contrary to unsubstantiated thesis in the market, Guan Chong stands to benefit from more than just a one-off advantage stemming from securing low raw material costs early in the current environment of elevated bean prices.
"Rather, the most important profitability metrics of a grinder rely on the combined ratio (which is a key driver in the average selling price and revenue) among others.
"In normal circumstances, both the butter and solids ratios tend to balance off each other in an uptrending and downtrending cocoa bean price environment, leading to a rather neutral impact on profitability."
It noted that however, as both ratios are at a historic high given the supply shortage (in both bean and grinding) and sustained demand, Guan Chong has benefitted since January 2024.
These should substantially expand grinding margins and fuel robust earnings potential in the second half of FY24 and FY25, supported by forward selling mechanisms.
"Bean deficit in the 2023-2024 season, affected by adverse weather, pod disease and swollen shoot virus, coupled with shortage at chocolate makers shifted the dynamics to a seller's market and it should remain in the current mid-crop season (April-September) where beans are hard to come by," RHB Research added.
