Additional production capacity for Cocoaland

by **Cals** Mon 21 Oct 2013, 13:57

Business & Markets 2013

Written by AmResearch

Monday, 21 October 2013 11:00

Cocoaland Holdings Bhd
(Oct 18, RM2.14)
Maintain buy at RM2.14 with a fair value of RM2.85: We reaffirm our “buy” recommendation on Cocoaland, with an unchanged fair value of RM2.85, based on our discounted cash flow-based valuation.

Cocoaland has just completed the acquisition of a piece of freehold land (98,629 sq ft) and buildings (34,821 sq ft; comprising a single-storey warehouse and two-storey office) in Rawang, Selangor, for a cash consideration of RM11.5 million.

We understand that the land was bought for RM90psf while the construction cost of the warehouse is RM120psf. The implied market value of the land and buildings is RM13.1 million.

We are positive on this acquisition as Cocoaland’s manufacturing capacity is expected to grow by 64% as part of its expansion plans.

Its beverage production (comprising two lines) at Lot 88 manufacturing facility is currently running at full capacity. To allow for the beverage line’s capacity expansion (that is, to set up an additional line), the recent new lines for the production of fruit candy and hard candy at Lot 88 will be temporarily moved to the newly acquired warehouse.

Cocoaland has a vacant plot of land in Rawang (acquired in 2011 and conveniently located beside the new warehouse facility) on which a factory is to be built. Once it is completed by end-2014, it will house the new fruit candy and hard candy production lines permanently.

Note that this land was previously earmarked for chocolate and wafer production. Once the new factory is completed, the warehouse facility will be renovated to serve as Cocoaland’s chocolate and wafer production plant. Renovation is expected to be completed in 2016 financial year (FY16).

While we are positive on the group’s overall capacity expansion, earnings before interest, tax, depreciation and amortisation (ebitda) could be compressed due to higher start-up costs for the new production lines. Our earnings per share forecast is maintained for now.

From a valuation standpoint, the stock is trading at 16 times price-earnings ratio for FY14 ending Dec 31, slightly below its historical five-year average of 18 times. — AmResearch, Oct 18

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This article first appeared in The Edge Financial Daily, on October 21, 2013.