Cocoaland ... Mar10

S & P Results Review & Earnings Outlook

• 4Q09 results were in line with our expectations. Full-year net profit of MYR19.7 mln came in close to our forecast of MYR19.9 mln.

• Net profit more than doubled YoY in 2009, on the back of revenue growth of 3.4% and an improved product mix. Higher contribution from high margin products (fruit gummy and cocoa pie) and improved production efficiency helped drive operating margin to 19.6% in 2009 from 9.5% in 2008. Similarly, 4Q09 net profit rose 32% YoY, due to a better product mix.

• Cocoaland reduced its focus on its low-margin snack products, while concentrating on its high-margin fruit gummy and cocoa pie products. As a result, revenue contribution from fruit gummy and cocoa pie products in 2009 rose to 48% (from 45% in 2008) and 10% (from 5% in 2008) respectively.

• The installation of its beverage line has been completed and trial runs should start soon, followed by commercial production. Cocoaland will be launching six own-brand beverage drinks (with flavors such as apple, lime, orange and tea). With start-up costs and A&P expense for the new product line, we do not expect any contribution from the beverage division in the near term.

• Our 2010 net profit forecast is largely unchanged. We project a 13% growth in 2010 net profit driven by fruit gummy sales and lower taxation, partially offset by start-up costs for its beverage division. We also introduce our 2011 net profit forecast.

Recommendation & Investment Risks

• We raise our call on Cocoaland to Buy from Hold with an unchanged 12-month target price of MYR1.60. We like Cocoaland for its strong balance sheet (net cash of MYR15 mln or 12 sen per share), high ROE (2009: 21%) and good dividend yield (7.6% gross or 5.7% net).

• Our target price is based on applying a PER of 9x (unchanged) to its estimated post-placement 2010 EPS, and includes net DPS. Our target implies a discount of about 20% to the consumer staples sector in Malaysia. The discount reflects Cocoaland’s smaller market capitalization

• Risks to our recommendation and target price include sharp increases in raw material prices and inability to raise selling prices, which would hurt margins, execution risks with its beverage division, and a temporary share overhang from the private placement.