JB Cocoa’s bond yielding above 5%

Chart 1: Sales performance (2017-1H2022)

Source: JBC

JBC demonstrated its strong market presence as a midstream player in the cocoa industry, reflected by an average 10% y-o-y growth in sales over the past five years (2017-2021). Its operations remained resilient despite the challenging environment during the COVID-19 crisis in 2020 and 2021.

Chart 2: Plant utilisation rate (2017-1H2022)Source: JCB; Note: 1H2021 and 1H2022 utilisation rates are annualised

Source: JBC; Note: OPBITDA - Operating profit before interest, tax, depreciation and amortisation 

Despite a positive trend in sales given the robust demand, profit margins in 2020 and 2021 were pressured by the surge in ocean freight costs following the global container shortage situation. In cushioning the impact, the group has negotiated with forwarders on its freight contracts by way of commitments to limited volumes of cargo and re-routing of shipment via lower cost routes. 

In 1H2022, the group’s revenue and operating profit improved y-o-y to RM1.1 billion and RM48.2 million (1H2021: RM861.3 million; RM27.6 million), reflecting some recovery in the supply chain condition. The overall improvement of the group’s profitability in that period was also supported by a moderated commodity price (i.e, cocoa bean). 

Capital structure

As at end-June 2022, total borrowings stood at RM803.0 million. Of the total, about 90.1% are related to trade financing, of which are mainly utilised for the purchases of cocoa beans. As shown above, total borrowings rose in 2019 in tandem with the capacity expansion at PTP plant to fund its working capital requirement. Considering this, DE ratio stands at 1.07x in 1H2022.

We view that the credit risk remains manageable as these trade facilities shall be self-diminished from inventory and receivables. Excluding its trade financing, the group’s total borrowings would stand at RM79.1 mil, translating to an adjusted DE ratio of 0.11x. 

As the group intends to expand its production facility by about 38% in Malaysia and Cote d’Ivoire, based on the rating agency's report, the adjusted DE ratio (excluding trade facilities) is expected to increase to about 0.6x over the near-to-medium term. The plant expansion will have a capex allocation of RM130 mil p.a. over the next five years (2023-2027). 

Cash flow protection and liquidity 

Chart 5a: Cash flow fluctuations over 2017-1H2022 
Source: JCB

MARKET RISK 

Ukraine-Russia conflict

JBC does not have any assets located in Russia and Ukraine. In terms of revenue contribution, these two countries account for about 17% of the group’s total revenue in 2021. While we note on the devaluation of Russian Ruble and sanctions applied to some parts of the Russian banking system could affect the demand from the country, the risky situation in Ukraine may also challenge trading activities of the industry.

Against the current backdrop, we believe the group is partly insulated from the sanctioned business activities. This is evidenced by the unchanged revenue contribution from the European region of 23% throughout 2020 and 2021. 

Inherent fluctuation of cocoa bean prices

About 94% of the group's revenue accounted for raw material in 2021, reflecting high cost volatility exposure. Principally, cocoa bean price levels are dependent on the total production for the period. Factors affecting the amount of cocoa bean output include, among others, inflationary pressures which can impact the prices of farm inputs, thus, resulting in a reduced usage of fertilisers, combined with weather conditions and disease outbreaks.

Chart 6: Cocoa bean daily price trend (USD/MT) 
Source: International Cocoa Organisation (ICCO)

According to ICCO, recent cocoa demand has held up on multiple fronts despite rising input costs, including high energy costs alongside supply chain issues and increase in interest rates among others. Indeed, demand has thus far remained steady during the season and the reduction seen in global supply has to this point been less disruptive to the cocoa market. Yet still, it is worth noting that with the current slowdown in the global economy, cocoa demand is subject to many uncertainties.

To some extent, the group’s business nature, results in a natural hedge between the prices of cocoa beans (as raw materials) and manufactured cocoa products. We note that the group may enter into cocoa beans futures to manage the risk. However, in a high cocoa bean price environment, margins could be eroded as grinders may strive to maintain competitive margins. In this regard, a diversification of cocoa bean supply is key to optimise and manage the group’s open sales and purchase commitments and inventory of raw materials.

Diversified cocoa bean supply

JBC’s diversified sourcing profile in procuring cocoa minimises its exposure to region-specific issues such as weather condition and changes in regulatory environment. In 2021, about 8% and 52% of cocoa bean purchases comes from the group’s top and top 10 suppliers. Therefore, we believe exposure to supplier risk is deemed manageable. 

While the bulk of cocoa bean is derived from the West Africa, the group also obtains its source from other countries such as Ecuador, Indonesia and Vietnam. Its latest establishment of cocoa bean facility in Cote d’Ivore would enhance quality control, increase cost efficiency, as well as ensure adherence to traceability and sustainability requirements in the cocoa bean procurement process.  


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