CIMB smells sweet success in Cocoaland

CIMB Research has initiated coverage on COCOALAND HOLDINGS BHD [] with an outperform call and a target price of RM2.04.

“The stock offers juicy upside of 49% to our target price. It also boasts the highest dividend yield and lowest price-to-earnings (PE) and price-to-book value (PBV) in our food and beverage universe.

It said Cocoaland was one of the country’s leading producers of confectionery such as fruit gummy, snacks and chocolates, as well as drinks. It is also the largest producer of fruit gummies in Southeast Asia.

CIMB Research added the company planned to launch its own tea and fruit/vegetable juice next year. “The drinks division could surprise on the upside if its own-brand beverage takes off in a big way. The company is also setting up a new polyethylene terephthalate (PET) plant capable of producing 120 million bottles annually that can take hot fillings.

“It is expected to start operations at the end of the year and will supply on an OEM basis to MNCs (multi-national corporations) as well as for Cocoaland’s own-brand drinks,” it said.

It also said the company’s balance sheet was strong, with RM24.6 million net cash, or 20 sen a share, as at end-June. Even after funding RM20 million capital expenditure for its new factory in Rawang, its net cash should be around RM10 million by year-end.

Meanwhile, the research house said although it had been cautious on initiating coverage on small-to-mid cap stocks this past year, as their liquidity could dry up fast when the market started falling, it believed some small-to-mid cap stocks still offered value.

“Cocoaland is one of them. The company is involved in the defensive F&B industry and trades at a still-attractive CY11 PE of 5.9 times, even after its share price upswing over the past few months. Liquidity is decent with an average three-month daily volume of 1.6 million shares,” it said.

As for its operations, CIMB Research said 80% of Cocoaland’s sales were from its own brand, with OEM sales to MNCs making up between 15%-20% of its revenue, and more than 30% of its revenue derived from direct export sales. The company exports to more than 40 countries around Asia and the Middle East.

It has three Malaysian plants, including its main plant in Rawang, and one in Fujian, China, with a group production capacity for all its products at 22,500 tonnes annually, the research house said. The company is also building a new plant on a recently-acquired 2.43ha land near Rawang, expected to be completed by year-end.

According to CIMB, Cocoaland’s export sales were expected to be its main growth market over the next few years, having risen annually since 2004, except in 2008, although sales volume held steady at the time.

The company’s net earnings were expected to grow more than double this year, due to major cost savings from improved production efficiency, lower factory overheads and a better product mix.

“In the first half ended June 30, 2009, net profit shot up 236% year-on-year to RM11.1 million,” it said. “However, earnings are expected to plateau in 2010, largely due to start-up losses for its PET bottle operations and high advertising and promotions expenses for the launch of its own drinks brand,” it said.

The research house added, however, FY2011 could turn out to be a “major surprise” for the company if its drinks business took off in a big way.

Cocoaland closed at RM1.40 yesterday, up three sen