Guan Chong: Buy, fair value RM1.96

PM Securities Sdn Bhd has recommended a "buy" call on cocoa processor Guan Chong Bhd (5102), saying that it is attractively priced with much upside potential, its relatively resilient business model and earnings potential with the oncoming new capacity in Indonesia.

The research firm projects that the stock has a potential upside of 18 per cent.

Backed by strong earnings surge in financial year 2010, Guan Chong is valued at RM1.96 on 8 times financial year 2010 price earnings ratio.

This is at a discount to other food and beverage players for its smaller size and near single product characteristics.
Trading at price earnings ratios of 6.8 times and 6.3 times for financial year 2010 and financial year 2011, Guan Chong is an undervalued stock.

It also falls under the favourable matrix of low price earnings ratio and high return on equity combination, with a return on equity of over 35 per cent for financial year 2010.

The positive factors in favour of Guan Chong are growing outsourcing activities by international chocolate-based manufacturers for grinding services and increasing chocolate consumption in Asia-Pacific.

This phenomenon creates new growth areas, beside the more traditional US and European markets.

Another positive factor is the use if chocolate in more food and beverage products.