MARC has affirmed its rating of AA-IS  on Guan Chong Berhad's (GCB) Sukuk Wakalah Programme of up to RM800.0 million with a stable outlook.

The affirmed rating reflects GCB's strong position in the midstream cocoa supply chain as the largest cocoa grinder in Asia and fourth-largest in the world, as well as its strong operational track record. Moderating the rating is cocoa price volatility, exacerbated by the impact from the pandemic, and the group's rising leverage position.

We note that GCB's revenue base has grown following the consolidation of the recently acquired industrial chocolate manufacturer, SCHOKINAG-Schokolade-Industrie GmbH (SCHOKINAG) in Germany in 2020. Revenue grew by 25.3% y-o-y to RM3.7 billion in 2020 but the growth was tapered by a marginal 0.9% y-o-y to RM1.8 billion in 1H2021. The weaker sales performance in 1H2021 underscores the impact from the pandemic that led to supply chain disruptions and weak global consumer spending. Coupled with higher freight rates, operating profit declined significantly to RM99.6 million from RM168.3 million a year earlier.

We view that earnings in the near to medium term would be supported by the gradual reopening of economies and the easing of pandemic concerns. The expected completion of GCB's 60,000MT grinding facility in C?te d'Ivoire in June 2022 could further support earnings. Grinding utilisation rate in 2020-1H2021 has remained high at above 95%, albeit with disruptions caused by the pandemic; this also takes into consideration an additional 7,000MT annual grinding capacity at the SCHOKINAG facility. Total annual grinding capacity stood at 257,000MT as at end-June 2021.

We note that the group's expansion has been partly funded by borrowings, including the RM300 million from the rated facility. Total borrowings rose to RM1.2 billion from the projected RM1.1 billion due to additional trade funding. Its debt-to-equity (DE) ratio stood at 0.98x at end-June 2021. Group borrowings could increase go