Highlights:
· In 1HFY2024, JB Cocoa demonstrated strong revenue growth by 67.2% YoY from USD 271.2 million to USD 453.3 million, mainly attributed to higher selling prices and shipment volume. Excluding unrealised mark-to-market hedging gain of USD 38.8 million, PBT will be slightly lower compared to same period in FY2023.
· JBC’s borrowings increased by 17.6% to USD 318.8 million, driven by higher trade bills and a new sukuk issued. The higher borrowings are actually within our expectations as higher costs incurred amidst the high bean prices environment.
· Cocoa bean production is expected to recover in 2025 as weather conditions improve in key production regions such as Ivory Coast and Ghana. Hence, we believe demand for cocoa will remain stable.
· Overall, we view that the group's performance remains solid and we are holding a positive stance towards its operations.
· Owing to this, investors may consider JBCOCO 5.820% 28Nov2025 Corp (MYR) and JBCOCO 6.000% 13Nov2026 Corp (MYR) as they are more certain compared to the longer-term bond JBCOCO 5.900% 18Mar2027 Corp (MYR). Existing investors can continue to hold.
To Recap:
In April this year, MARC Ratings revised its rating outlook on cocoa grinders JB Cocoa Sdn Bhd and Guan Chong Berhad from stable to negative. This action was primarily driven by abnormal cocoa bean price movements, which could potentially lead to a sharp increase in borrowing levels. Additionally, adverse weather conditions have severely impacted the cocoa bean supply in key cocoa-producing countries.
In our previous article update, we highlighted that JBC recorded USD 12.3 million unrealised mark-to-market hedging loss in FY2023 due to the sharp increase in cocoa bean prices.
Following the sharp volatility in cocoa bean prices, many investors are concerned about whether the unprecedented increase in prices will lead to higher unrealized hedging losses and adversely impact the company’s financial performance.
Chart 1: International Cocoa Bean Price (USD / ton)
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In the recently announced 1HFY2024 report, JBC has shown that its performance remains solid despite a challenging environment, with stronger figures compared to previous year.
JBC’s profitability remains solid in 1HFY2024
In 1HFY2024, JB Cocoa demonstrated strong revenue growth by 67.2% YoY from USD 271.2 million to USD 453.3 million, mainly attributed to higher selling prices and shipment volume. Nevertheless, higher cocoa bean prices resulted in higher cost of sales as well, growing USD 240.7 million to USD 391.2 million in 1HFY2024.
Additionally, JBC recorded an unrealised mark-to-market gain of USD 38.8 million on derivative instruments due to sharp volatility in cocoa bean prices. The actual realization of these hedging gains or losses will depend on the prevailing cocoa bean price at the settlement date. The group’s profit before tax surged tremendously by 306.6% to USD 43.4 million compared to the same period in the previous year.
On the other hand, JBC’s finance costs increased by 113% to USD 11.8 million, this was mainly due to increase in the trade bills utilization resulting from higher bean price, higher interest rate environment and additional financing costs incurred on the Sukuk.
Despite higher PBT recorded in 1HFY2024, we view that their performance actually declined in 1HFY2024. If we exclude the unrealised mark-to-market gain of USD 38.8 million, their PBT will be around USD 4.6 million.
Table 1: Profitability indicators (USD million)
2022 | 2023 | 1HFY2023 | 1HFY2024 | |
Revenue | 509.6 | 595.8 | 271.2 | 453.3 |
Cost of sales | (461.5) | (555.5) | (240.7) | (391.2) |
EBITDA | 33.7 | 24.6 | 20.5 | 59.1 |
Profit before tax | 16.7 | 1.9 | 10.7 | 43.4 |
Source: Company's Reports, iFAST Compilations. Data as of 30 June 2024.
Credit profile remains decent
In 1HFY2024, JBC’s borrowings increased by 17.6% to USD 318.8 million, driven by higher trade bills and a new sukuk issued under Sukuk Wakalah programme in March this year. About 77% of the borrowings were made up by trade bills facility, which will be pared down when their sales are realised.
The higher borrowings are actually within our expectations as the group required higher trade facility to fund the cocoa beans procurement in the high bean prices environment.
Although the group still had a negative cash flow, but it saw improvement compared to FY2023. We view that the negative cash flow in this case doesn’t represent a problem as the negative cash flow was due to increase in inventories.
Table 2: Credit metrics (USD million, unless otherwise stated)
2022 | 2023 | 1HFY2024 | |
Short-term Borrowings | 155.4 | 227 | 256.3 |
Long-term Borrowings | 21.4 | 44.1 | 62.4 |
Borrowings | 176.8 | 271.1 | 318.8 |
- Trade lines | 138.3 | 225.4 | 254.1 |
- Term loans | 38.5 | 45.7 | 64.7 |
Cash and bank balances | 21.6 | 26.3 | 35.7 |
Current ratio | 1.35 | 1.18 | 1.22 |
CFO | 49.2 | (41.1) | (17.8) |
Net DE ratio (x) | 0.87 | 1.4 | 1.3 |
Industry Outlook
As shown in Chart 2, cocoa grindings have been on an upward trend over the decades, reflecting the rising demand for cocoa despite sharp volatility in cocoa price in 2023 and 2024. According to the International Cocoa Organization (ICCO), demand for cocoa in Europe and North America increased by 4% and 2% YoY respectively in the 2Q2024 despite cocoa bean prices remain elevated.
Furthermore, cocoa bean production is expected to recover in 2025 as weather conditions improve in key production regions such as Ivory Coast and Ghana. This could be benefiting JBC as the company is currently expanding their cocoa processing facility in Ivory Coast, allowing them to capture a share of the growing cocoa market.
Therefore, we believe that demand for cocoa will remain stable. Additionally, we view that JBC's operations will be relatively stable as their customer base is mostly made up by key international players. However, the company’s profit margin remains uncertain as fluctuations in cocoa bean prices could potentially result losses in the Group’s hedging activities.
Chart 2: Total World Cocoa Grindings (thousands of metric tons)
Our view
JBC's financial performance has improved compared to the previous year due to the unrealised mark-to-market gains. We view that it is still manageable although they would have recorded lower PBT after excluding unrealised gain, and the higher finance costs recorded as a result of higher bean prices.
Despite higher debt levels, we believe their credit profile remains decent considering that their cash and bank balances of approximately USD 35.7 million are sufficient to cover short-term obligations of USD 9.7 million (excluding trade lines).
The management has indicated that the cash will be mainly reserved for bonds redemptions. The current cash level is also sufficient to cover longer-term bonds maturing in 2025 and 2026 with a total issuance size of RM 75 million (equivalents to about USD 17 million). Also, we believe that the management will continue to build up their cash to prioritise their bonds redemptions (total issuance size of 3 bonds is RM 175 million, equivalents to about USD 40 million).
Moreover, we don’t see much worry pertaining to the supply shortages and price volatility as the group has mitigated concentration risk by sourcing beans from various countries and passing the cost to their customers.
To conclude, the group’s overall performance remains solid and we still maintain a positive outlook on its operations despite the challenging environment.
Owing to this, new investors may consider JBCOCO 5.820% 28Nov2025 Corp (MYR) and JBCOCO 6.000% 13Nov2026 Corp (MYR) while existing investors can continue to hold.
Table 3: JBC’s Issuances
Bonds | Years to Maturity | Yield to Call/ Yield to Maturity |
1Y3M | 5.0% | |
2Y3M | 5.35% | |
2Y7M | 5.41% |
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