Softening grinding volumes a negative for Guan Chong

PETALING JAYA: Asia’s largest cocoa grinder, Guan Chong Bhd, faces near-term earnings volatility as grinding volumes are expected to soften year-on-year in the third quarter of 2025 (3Q25).

However, on the bright side, demand visibility from customers going into 4Q25 appears strong, with pricing dynamics suggesting margin remains healthy in the second half of 2025 (2H25).

“Profitability and margins will be supported by delayed sales delivery from the first half, butter ratio averaging, firm powder prices, discounted bean procurement, easing hedging and financing costs.

“We remain constructive on Guan Chong’s outlook despite near-term earnings volatility,” RHB Research said in a note.

In 1H25, Guan Chong’s revenue surged to RM8.2bil, which more than doubled year-on-year.

The surge was driven by higher average selling prices, despite lower production and sales volumes.

However, core profit declined to RM142.8mil, which dropped by 10.2%.

This was on the back of a RM330mil net hedging loss, weaker sales tonnage and higher finance and tax costs

Elaborating on the market dynamics, RHB Research said elevated bean prices persist as the New York exchange reflects a 15% tariff, creating a substantial discount on beans, especially for the South American origin.

In addition, the bean futures market remains under-participated by traditional short sellers as demand weakens and bean stock at the terminal remains low.

“Guan Chong has capitalised on this arbitrage by stepping up procurement, securing cost advantages for the coming quarters.”

With beans trading at elevated levels, butter ratios have eased from six months ago, weighed by tariff-driven demand caution and improved bean availability.

The management, however, views this as temporary, according to RHB research.

“Ratios are expected to trend higher once bean terminal prices normalise, tariff uncertainty recedes and demand picks up into the main-crop season.

“Consequently, the group is refraining from aggressive forward sales for 2026 at current low ratios amid the risks and market uncertainty.”

Looking into financial year 2026, the research house opined that Guan Chong’s growth catalysts include capacity expansion in the Ivory Coast, a normalised cocoa market and structurally stronger margins.

This will be underpinned by elevated bean prices, upselling strategies via strengthened sales channels, the European Union Deforestation Regulation complaint and industry consolidation.

RHB Research pointed out that Guan Chong’s current valuations remain compelling.

“We believe the market underappreciated Guan Chong’s ability to navigate an unprecedented cocoa market while sustaining respectable profitability and operational resilience, albeit with elevated working capital needs.”

It has a “buy” call on the Guan Chong stock, with a target price of RM1.80 per share.