Cocoaland Holdings Bhd’s shareholders have had a sweet ride this year, especially in the last month when its share price doubled. The home-grown manufacturer of confectionery and food products is targeting beverages for its next phase of growth, and could see the emergence of a new strategic partner to add value to the company.
The family business, which began from selling deep-fried food from a van in the 1970s, has expanded beyond Malaysian shores to include a production plant in China and a growing export market.
Cocoaland’s portfolio of snacks and confections includes brands like Lot 100, Koko Jelly, Rotong and CocoPie. It has three factories in Malaysia — in Kepong, Rawang and Kampar — and a joint-venture production facility in China’s Fujian province to manufacture fruit gummy for the China market.
The company also manufactures for the OEM market with Nestle, Wrigley, and 21st Century as its major customers.
Share price rally, new strategic investor?
Cocoaland, which has a market capitalisation of RM364.3 million, has seen its shares rise over the past month, amid a rally in consumer stocks.
Its shares ended last Friday at RM2.76, off an intra-day high of RM2.95, which was the highest since its IPO in January 2005 at 65 sen per share. Cocoaland’s shares are up 110.7% this year, significantly outperforming the FBM KLCI’s 5.7% rise.
While investors may have appreciated Cocoaland’s prospects and low starting valuations, they would have also noted the company’s recently announced plans on the possible entry of a new strategic partner.
On July 21, the company announced that it was “currently in discussions and negotiations with potential partners to broaden Cocoaland’s growth which may lead to new placement of shares at discount”.
A day later, the company said the strategic partnership could involve the issuance of new shares amounting to between 20% and 30% of its share capital. Cocoaland said one of the potential partners might start a due diligence exercise as early as this week, and negotiations were due for completion next month.
The potential entry of new strategic partners is expected to help the company improve its product and market development initiatives, and strengthen the company’s market position, according to the company.
In April 2010, the company had completed a private placement of 12 million new shares at RM1.35 each to raise up to RM16.2 million, which will fund its capital expenditure (capex) and working capital needs.
Beverages to drive growth
Notwithstanding the value creation proposition of a new potential partner, Cocoaland is embarking on the next phase of growth, anchored by an expansion of its beverage division, which includes the building of a new factory in Rawang.
The company has big plans for the beverage unit, having cemented its position in the confectionery market.
Cocoaland group accountant Tai Chun Wah told The Edge Financial Daily in a telephone interview last Friday that the firm has earmarked RM82 million in capex for the three-year period ending Dec 31, 2012. Of the planned capital outlay, more than half is expected to be spent to further develop the beverage business.
Cocoaland’s FY10 planned capex of RM37 million comprises a RM12 million allocation to expand its existing beverage production facilities, RM10 million each for its fruit gummy and “CocoPie” branded chocolate marshmallow product operations, and RM5 million for other capital commitments.
The company plans to spend RM35 million in FY11, including RM30 million for the beverage operations.
For the beverage unit, the company is expected to fork out RM26.5 million to establish a new production line within a new factory in Rawang, Selangor. The RM26.5 million outlay comprises land and building cost of RM11.5 million, and RM15 million for machinery.
“Our capex for FY11 depends on the expansion of the beverage unit,” said Tai.
Cocoaland has earmarked, in FY12, a smaller capex of RM10 million in view of the planned substantial capital outlay in the two preceding years.
“We don’t want to expand so fast,” Tai said, adding that Cocoaland would use internally generated funds and share placement exercise to finance its expansion.
The new facility in Rawang will cater to housebrand and OEM operations, and will produce health beverages with an expected annual capacity of 240 million units of 500ml bottles by FY11. The initial 120-million-bottle annual capacity is expected to come on stream by September.
The new beverage factory also includes a third party-owned polyethylene terephthalate (PET) bottle production line.
Analysts cautiously optimistic
Analysts said while any strategic tie-up with a new partner would be positive for earnings growth in Cocoaland, there was a risk that the collaboration might not be immediately earnings accretive.
“This latest development is a positive surprise, but we are cautiously optimistic due to insufficient details at this juncture,” AmResearch Sdn Bhd wrote in a note last Friday.
AmResearch, which is maintaining its earnings forecast for Cocoaland, said the food and beverage player’s “aggressive but well-defined” capacity expansion, besides its wider product portfolio this year, could lift the firm’s net profit by 64% from a projected RM20.3 million in FY10 to RM33.3 million in FY11.
The research house maintained its buy call and fair value of RM3 for Cocoaland shares.
Cocoaland’s net assets per share stood at 88 sen as at March 31 this year. The company has a strong balance sheet with a cash pile of RM15.86 million and borrowings of just RM22,000, before including gross proceeds of RM16.2 million from the private placement exercise in April.
Earnings-wise, the company’s net profit fell by 26.2% to RM4.08 million, or 3.4 sen a share, in the first quarter of 2010 as it registered higher start-up costs from its beverage production line amid a strengthening ringgit. Revenue rose by a marginal 0.1% to RM35.21 million.
Exports, both direct and indirect via contract manufacturing for OEM-based clients, collectively make up about half of Cocoaland’s turnover and all exports are transacted in US dollars. Hence, a strengthening of the ringgit versus the greenback would negatively affect its bottomline.
AmResearch expects EPS of 12.8 sen for FY10 and 21 sen for FY11. At the current price of RM2.76, its shares are trading at a price-earnings ratio of 21.6 and 13.1 times, respectively for FY10 and FY11, based on these forecasts.
Apart from the beverage venture and a potential new partner, Cocoaland is also expanding its global reach. It already has a presence in over 40 countries. It plans to intensify efforts to grow its presence in the Middle East and China, apart from Vietnam, Indonesia and Thailand.
From its humble beginnings, Cocoaland is evolving into a full-fledged food and beverage player with a global reach. It is a sweet success story.
Written by Chong Jin Hun
This article appeared in The Edge Financial Daily, July 26, 2010.
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