Friday, January 7, 2011

COCOLND - Positive developments at Cocoaland

Stock Name: COCOLND
Research House: AMMB

Cocoaland Holdings Bhd
(Jan 6, RM2.76)
Maintain Buy at RM2.62 with lower fair value RM3.30 (previously RM3.70)
: We maintain our 'buy' recommendation on Cocoaland Holdings Bhd, but with a lower fair value of RM3.30 (previously RM3.70) as we fine-tuned our earnings forecasts after incorporating lower margin assumptions from higher raw material costs.

We have trimmed our FY10F/12F earnings by 13% to 15%, post upward adjustments in sugar and packaging material costs which constitute close to 45% of the group's cost structure. Recall, the government raised the sugar price by 21% to RM2.10 per kg on Dec 6, 2010, while packaging materials have surged 10% to 35% in the last three to four months, in tandem with higher crude oil prices.

While the unfavourable cost structure would result in weak earnings in the next few quarters, FY11F earnings would be well cushioned by eventful earnings contribution from its maiden 'hot-filling' PET production line.

Recently, the group, through its wholly owned subsidiary Cocoaland Industry Sdn Bhd, entered into separate contract packing agreements with F&N Beverages Manufacturing Sdn Bhd and F&N Foods Pte Ltd as a non-exclusive contract packer for the preparation, packaging, packing and delivery of their products.

We are positive about these developments. The formalisation of the contract packing agreements will underpin Cocoaland's robust earnings growth going forward, as secured high off-take rates by Fraser & Neave Holdings (F&N) will serve to truncate idle capacity.

Recall, the group plans to accelerate expansion plans for the installation of four PET production lines by end-FY12F, from just one currently. This would effectively bring total installed capacity from 120 million bottles to 480 million bottles.

We believe Cocoaland will be contract packing F&N's 'FruitTree' and 'Sunkist' range of juices, given the latter's intention to rival C.I. Holdings' 'Tropicana' juice for a broader market share. In the long term, we see good potential for venture opportunities between the group and F&N in non-beverage segments, in line with the latter's intention to build its third pillar within the food business.

Valuation is attractive, with the stock currently trading at 13 times FY11F earnings. Our fair value of RM3.30 is based on an unchanged target price-earnings ratio of 16 times FY11F earnings, or a 10% discount to F&N's target PER of 18 times. ' AmResearch Sdn Bhd, Jan 6

This article appeared in The Edge Financial Daily, January 7, 2011.

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