MARC Ratings has assigned a preliminary rating of A+IS with a stable outlook to JB Cocoa Sdn Bhd’s proposed Islamic Medium-Term Notes (Sukuk Wakalah) programme of up to RM500.0 million.
JB Cocoa is a key manufacturing subsidiary of JB Foods Limited, a Singapore Stock Exchange listed company, which has provided a corporate guarantee to the proposed programme. The rating assessment considers the consolidated credit profile of JB Foods due to operational and financial linkages within the group.
The key rating factors are the group’s defensible market position as one of the world’s largest cocoa grinders and healthy operating track record in the cocoa industry. Beginning operations in 2003 in Pelabuhan Tanjung Pelepas, Johor, JB Cocoa currently has a grinding capacity of 120,000MT p.a., and when combined with the 60,000MT p.a. grinding capacity of sister company PT Jebe Koko in Gresik, Indonesia, the group’s total grinding capacity stands at 180,000MT p.a. Utilisation rate remains healthy at around 82.7% in 1H2022 (2021: 80.6%), reflecting capacity expansion that has been in sync with demand growth. Its next major expansion is the 50,000MT p.a. processing facility in Côte d’Ivoire, construction of which began recently in late June 2022. Proceeds from the initial tranche of up to RM150 million will be utilised to fund this project, estimated to cost EUR60 million and slated for completion by end-2024. We view that the facility in the West African country, a key producer of cocoa beans, will afford lower logistical costs and tax savings on cocoa exports to the European Union (EU).
The group produces mainly cocoa butter and cocoa powder. Between 2017 and 2021, sales grew by about 10% p.a., underscoring the group’s market position as a midstream global player in the cocoa industry. Sales have continued to grow despite the challenging environment during 2020-2021 due to the pandemic. Cocoa butter (mainly for chocolate production) and cocoa powder (mainly for beverages and baking) remain key contributors to revenue, accounting for about 53% and 38% in 1H2022. We note that the group largely exports to established global players mainly in the US, China and the EU, but has increased sales to the Southeast Asian region due to geopolitical tensions as well as to improve margins from lower ocean freight costs.
The group has diversified cocoa bean sources; its largest and top 10 suppliers account for 8% and 52% of purchases in 2021 and therefore exposure to supplier concentration risk is low. We also note that about 90% of revenue accounts for the cost of cocoa beans, the price of which remains volatile but largely mitigated through cost pass-through to customers. Nonetheless, recent increases in freight costs have dampened group margins. In 2021, the 66.6% decline in operating profit to RM38.4 million was due to high trucking and freight costs owing to supply chain disruptions. We expect this situation to ease in the medium term.
For 1H2022, group revenue and operating profit improved y-o-y to RM1.1 billion and RM48.2 million (1H2021: RM861.3 million; RM27.6 million), driven by moderating cocoa prices and some easing of supply chain disruptions. Group borrowings, comprising largely trade financing, stood at RM803.0 million as at end-June 2022, translating to a debt-to-equity ratio of 1.07x. Excluding trade financing, the group has a term loan of RM79.1 million. Over the medium term, borrowings are projected to increase to about RM1.4 billion (including trade financing) to fund capacity expansion worth up to RM650 million, including the Côte d’Ivoire project.