Strong 2Q performance forecast for Guan Chong
Contango refers to when the futures price of cocoa beans is higher than the spot price.
'The healthy combined ratios realised in the first quarter of this year (1Q25) are expected to continue into 2Q25 before normalising in 2026, a scenario already reflected in our forecasts.
'Nonetheless, we believe combined ratios and margins will likely remain at an elevated level relative to previous years, underpinned by sustained demand, higher working capital, risk premiums and industry consolidation,' RHB Research said.
It pointed out that cocoa butter ratios have declined from six months ago due to improved bean availability and tariff-induced caution.
Even so, the research house said cocoa butter ratios remain elevated relative to historical norms.
Further, there were also slower grindings due to high prices and tariff-related uncertainties.
'Bloomberg reports that European cocoa grindings have declined for four consecutive quarters, down by 5% year-on-year (y-o-y), while Malaysian grindings fell 22% y-o-y in 2Q25.
'This reflects changes in product formulations, reduced pack sizes and substitution with alternative ingredients amid elevated bean prices and ongoing tariff uncertainties,' RHB Research said.
The research house noted that these dynamics have tightened the supply of cocoa powder, which remains expensive but fails to incentivise higher grindings due to substantial working capital requirements and volatile market conditions.
'Consequently, Guan Chong's overall utilisation rate could ease to between 85% and 90% in the second half of this year, as its US customers, which account for 15% of revenue, adopt a wait-and-see approach on tariff uncertainties,' RHB Research said.
On a positive note, the research house said the reduction in production could improve working capital efficiency and cash flow.
However, management has observed improving sales trends at more moderate bean prices and expects a rise in spot buying closer to the seasonal peak season in late 3Q to early 4Q, as customers move to secure their positions.
RHB Research said it believes Guan Chong's recent share price correction is overdone, despite expectations of slowing global demand and a softer cocoa butter ratio. This is considering the prospect of record-high FY25 forecast earnings backed by robust margins.
'We expect a stronger quarter-on-quarter performance in 2Q, backed by healthy combined ratios,' it said.
RHB Research maintained a 'buy' call on Guan Chong with a target price of RM2.58, from RM3, and pegged it to an unchanged 15 times FY26 price-earnings multiple, on par with the consumer product index.
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