Monday, February 24, 2014

GUAN CHONG BERHAD Value Evaluation

Guan Chong Berhad is the Malaysia’s sole largest listed cocoa bean manufacturer. Venturing into industry which specializes in cocoa products, this company has a lot of potentials and untapped market due to its MONOPOLY position regionally. Being able to operate based on its economic of scales and ever increasing production, cost is easily spread among its large scale production. Also, being in the industries for decades, Guan Chong has been breeding and improvising its cocoa seeds with a lot of trials and errors. In terms of time and effort consumed to produce the best seeds, others will find it hard to cop up with Guan Chong.

Staying in this industry with commodity as major basis of raw material, the companies need to place a lot of capital to purchase contracts in order to secure the price of raw material in the future in a market which is full of fluctuations. At the end of the day, purchases of these contracts might result in speculative practices by the management which might deteriorate investors’ investment. Also, the industry is also extremely volatile to global crisis as shown in the drop of revenue during the 2009’s.

Guan Chong Berhad 10 Years financial Performance

Cash flow result from operating activities faces an extreme fluctuation in the past ten years and even down to negative figure. Although we can get both ratios at a satisfactory level, cash flow in the company itself is very doubtful. Based on the CF adjustments on 2012 alone, write down of  inventories value loss in derivatives make up RM7.6 million. Instead of the reported earning, it can be seen that gain on derivative is also added into the company's income statement. Despite the company's business nature of trading cocoa, it turns out that its board is more of a speculation of the raw cocoa by using different derivatives. This under cover issue may result in great loss for the investor. Also, drawing of loans amounted to RM160 million indicates that cash flow in the company is rather poor. It is only worth investing if it is priced below RM0.7 which is its book value.
Stock: GCB Code: 5102

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