MARC Ratings has affirmed its rating of AA-_IS on Guan Chong Berhad’s (GCB) Sukuk Wakalah Programme of up to RM800.0 million with a stable outlook. The outstanding under the programme stood at RM300.0 million as of October 17, 2022. 

The rating affirmation mainly reflects GCB's strong position in the midstream cocoa supply chain as the largest cocoa grinder in Asia and fourth-largest in the world, as well as its strong operational track record. Moderating the rating are cocoa price volatility which could erode margins, and the group's moderate-to-high leverage position.

For 1H2022, revenue grew by 19.2% y-o-y to RM2.2 billion, benefitting from easing of container shortages, and resumption of economic activities globally. Operating profit margin, which has been under some pressure from competitive pricing of cocoa butter as well as high logistics costs, recovered to 6.5% (1H2021: 5.4%). Over the near term, margin for cocoa butter would likely improve, based on expected increase in chocolate consumption with the resurgence of international travel. Further easing of container shortages, which would reduce logistics costs, would be supportive of earnings growth.

Grinding capacity utilisation rate was strong at 96.4% for 1H2022 (2021: 92.5%), despite the additional capacity of 20,000MT p.a. at its plants in Pasir Gudang, Johor. The commencement of GCB's new 60,000MT p.a. grinding facility in Côte d'Ivoire by end-2022 ?— increasing total grinding capacity to 337,000MT p.a. ?— would strengthen its global market position. This would be driven by GCB's ability to strengthen its foothold in Europe, a major chocolate-consuming region.

The grinding facility in Côte d'Ivoire, the largest cocoa bean sourcing country, will improve sourcing reliability and allow for shorter bean-to-ingredients period. This grinding facility will also supply to its wholly-owned Schokinag-Schokolade-Industrie GmbH's (SCHOKINAG) industrial chocolate operations in Germany, generating synergy from vertically integrated operations. Operating out of Côte d'Ivoire would also lower shipment costs and allow GCB to capitalise on import duty exemption into the EU, granted to the country.

Borrowings were slightly lower at RM1.2 billion as of end-June 2022 (end-2021: RM1.3 billion), driven by reduction in outstanding trade lines, in line with lower inventory levels. The easing of freight costs has supported goods deliveries to customers. Debt-to-equity (DE) ratio improved to 0.82x (end-2021: 0.96x). We understand that the group may issue about RM300 million under the rated sukuk over the near term to fund its expansion plans in the UK and Germany, with about 50% from the proceeds to be utilised to refinance its other borrowings. As the increase in borrowing level would be gradual, leverage position is expected to remain stable over the near term. In addition, proceeds from warrants exercise amounting to RM81.3 million in July-October 2022 as well as expected proceeds of up to RM86.7 million from further warrants exercise by November 4, 2022 will mitigate the impact of the higher borrowings on its leverage position.

The stable outlook reflects MARC Ratings’ expectation that GCB’s operational performance and strong market position would place it in good standing to benefit from the recovery of demand and selling prices.

Any upward movement in the group’s rating would be premised on substantial improvement in its leverage position and operating performance, in particular with the strengthening and sustaining of operating profit margin to above 10%. 

Downward rating pressure would occur if profitability deteriorates sharply from forecasts and/or the debt-funded expansionary efforts are not met with earnings accretion nor with any clear visibility of deleveraging.