MARC Ratings has affirmed its rating of AA-IS on Guan Chong Berhad’s (GCB) RM800.0 million Sukuk Wakalah Programme. The rating outlook remains negative.
The negative rating outlook primarily reflects the continued high and volatile cocoa bean price environment that has led to a sizeable increase in GCB’s working capital requirements. The rating agency would revise the outlook to stable if cocoa bean price abates to a normalised level and eases GCB’s borrowings. GCB’s established market position in the midstream cocoa supply chain — as the largest cocoa grinder in Asia and fourth in the world — and its longstanding operating track record are key rating drivers for the affirmation.
Cocoa bean price has been volatile, remaining higher than around the USD3,000/MT level prior to the price escalation in 4Q2023. As at end-September 2024, cocoa bean price was USD7,722/MT. The sharp price increase was due to low bean production in key cocoa bean producing countries, Côte d’Ivoire and Ghana, which accounted for around 60% of the world’s supply over the last decade. However, with the anticipated conducive weather conditions in these countries, cocoa bean production for the current 2024/2025 crop year (ending on September 30, 2025) is expected to improve, thereby potentially easing supply constraints.
The rating agency notes the utilisation rate of GCB’s grinding capacity of 330,000 MT p.a. stood at 97% as at end-June 2024, reflecting the continued strong demand for cocoa products despite the cocoa bean price increase. GCB continues to procure beans from other countries in West Africa, to fulfil its supply contracts to minimise disruption to operations.
GCB’s cocoa bean purchases at the prevailing bean prices have led to additional borrowings, which rose to RM3.4 billion in 1H2024 from RM2.2 billion as at end-2023. The rapid increase in borrowings outpaced equity growth, leading to a gross debt-to-equity ratio of 1.79x as at end-1H2024 (end-2023: 1.24x). Liquidity position with cash and bank balances stood at RM157.3 million as at end-June 2024. While revenue and pre-tax profit rose to RM4.1 billion and RM190.5 million in 1H2024 (1H2023: RM2.3 billion; RM65.5 million), operating cash flow remained negative, weighed down by working capital requirements.
The outstanding under the existing programme stood at RM600.0 million as at end-September 2024. The rating agency will continue to monitor the cocoa bean price environment and the impact on GCB over the next few months to take further appropriate rating action. Any outlook revision will mainly be premised on improvement in leverage and liquidity position.