MARC 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 affirmed rating 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 is cocoa price volatility, exacerbated by the impact from the pandemic, and the group’s rising leverage position.

We note that GCB’s revenue base has grown following the consolidation of the recently acquired industrial chocolate manufacturer, SCHOKINAG-Schokolade-Industrie GmbH (SCHOKINAG) in Germany in 2020. Revenue grew by 25.3% y-o-y to RM3.7 billion in 2020 but the growth was tapered by a marginal 0.9% y-o-y to RM1.8 billion in 1H2021. The weaker sales performance in 1H2021 underscores the impact from the pandemic that led to supply chain disruptions and weak global consumer spending. Coupled with higher freight rates, operating profit declined significantly to RM99.6 million from RM168.3 million a year earlier.

We view that earnings in the near to medium term would be supported by the gradual reopening of economies and the easing of pandemic concerns. The expected completion of GCB’s 60,000MT grinding facility in Côte d’Ivoire in June 2022 could further support earnings. Grinding utilisation rate in 2020-1H2021 has remained high at above 95%, albeit with disruptions caused by the pandemic; this also takes into consideration an additional 7,000MT annual grinding capacity at the SCHOKINAG facility. Total annual grinding capacity stood at 257,000MT as at end-June 2021.

We note that the group’s expansion has been partly funded by borrowings, including the RM300 million from the rated facility. Total borrowings rose to RM1.2 billion from the projected RM1.1 billion due to additional trade funding. Its debt-to-equity (DE) ratio stood at 0.98x at end-June 2021. Group borrowings could increase going forward as it plans to expand the capacities at its facilities in Germany and the UK, although the planned RM1.0 billion expansion will be undertaken gradually through 2024 and will be funded through a mix of borrowings and internally-generated funds. We understand that GCB is reviewing these plans and will proceed in accordance with market conditions. Nevertheless, if the group proceeds with a sizeable expansion without the corresponding earnings accretion and/or a realisable plan to deleverage, the rating would come under pressure. Potential inflow of RM200 million from warrants exercise in November 2022 would, on the other hand, ease some pressure on its leverage.

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my; 

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.