Potential upside for Cocoaland earnings

Cocoaland Holdings Bhd
July 22, RM2.85
Downgrade to hold at RM2.87 with target price of RM3.11: Cocoaland announced last Wednesday that it is in negotiations with potential partners to broaden its growth, a move which may lead to placement of shares in the company at a discount. However, in the announcement it was stated that no financial decisions had been made.

There has been news of a potential merger and acquisition involving Cocoaland in recent months. We remain neutral on this as management has yet to announce anything. Note that Cocoaland’s share price has appreciated by more than 100% in one month.

Cocoaland is allocating RM50 million as capital expenditure (capex) this year to grow its operations. This includes output expansion for its fruit gummy and Cocopie products, besides the company’s polyethylene terephthalate or PET bottling operations.

We are positive on this development as it will boost earnings from FY2011. We expect capex to be partially internally funded. Recall that Cocoaland had raised RM16 million from its placement of 12 million new shares earlier this year.

Given the potential growth spurt, we revise our earnings forecast for Cocoaland upwards by between 17% and 32% for FY2011-12.

By year end, Cocoaland is installing an additional production line each for its fruit gummy and Cocopie products, a move which is expected to boost output capacity for both products by 50% each.

The capacity expansion is expected to boost the company’s revenue by RM50 million to RM60 million.

On its PET bottling division, Cocoaland has commenced operations and has taken orders. We believe trial runs with multinational corporations for original equipment manufacturer (OEM) contracts earlier this quarter will be translated into sales next month. Cocoaland also plans to add another line to double its PET bottling capacity next year.

Recall that Cocoaland is also producing its own fruit drink, which will be launched soon under the brand “Fruit 10”. According to management, its PET bottling division will cater more for the OEM market.

By rolling over our valuations to FY2011, we derive a new target price of RM3.11 for Cocoaland shares based on FY2011 PER of 12 times. Given total returns of less than 15%, we downgrade Cocoaland to a hold. — TA Securities, July 22


This article appeared in The Edge Financial Daily, July 23, 2010.