Highlights:
- In 1HFY2024, JB Cocoa demonstrated robust operation performance, with a 67.2% YoY increase in its revenue.
- JB Cocoa’s borrowings increased by 17.6% to USD 318.8 million, driven by higher trade bills and new sukuk issued in March this year. This is within our expectations as higher trade bills needed to fund cocoa bean procurement. It is not signaling deterioration.
- We hold a positive stance towards JB Cocoa’s future outlook given its longstanding experience within cocoa industry and strong financial performance amid challenging environment.
- Investors may consider its upcoming issuance – Indicative price guidance for 3Y@5.6% / 5Y@5.75% area.
Introduction
JB Cocoa is the brand of premium cocoa ingredient products by JB Foods Limited (‘the group’) (SGX: BEW). The group’s principal activities comprise of the production and sales of cocoa ingredients products, i.e.: cocoa mass, cocoa butter and cocoa powder mainly to international players (eg: Mondelez, Nestle, MARS and etc).
Since its establishment in 2000, JB Cocoa has grown to become one of the world’s leading producers of cocoa ingredients (TOP 4 as of today). The company has also built strong partnerships with major global players including Mars, Mondelez, Nestle and more, solidifying its position in the international market.
Previous article update:
Credit update: JB Cocoa – Financials remain decent despite challenging environment | Bondsupermart
Business model – Stable and well-positioned in capturing market share
JB Cocoa’s business operates on a contract basis, with clients placing orders in advance for delivery at a future date (typically within 3 to 6 months). The company follows a cost pass-through pricing model, allowing them to transfer costs to clients. Hence, we view that the volatility in cocoa bean price will not significantly impacting the company.
Approximately 70%-80% of JB Cocoa’s clients are major global players such as Mars, Mondelez, and Nestle. Owing to this, we view that JB Cocoa’s business is relatively stable as these major players are unlikely to pull out their orders due to the supplier quality and reliability. This can be proven that the longstanding and strong partnerships between JB Cocoa and its clients.
Hence. we believe JB Cocoa’s business will remain stable as long as global demand for chocolate persists.
MARC Ratings maintains JB Cocoa’s rating outlook at negative
On 14 October 2024, MARC Ratings has affirmed its rating of A+is on JB Cocoa’s RM 500 million Islamic Medium-Term Notes (Sukuk Wakalah) Programme. The rating outlook remains negative.
This negative outlook is reflecting:
i) Prevailing volatile and high bean price environment (resulted from significant decline in bean production, attributable to adverse conditions in Ivory Coast and Ghana) has continued to weigh on JB Foods’ working capital requirements, leading to higher borrowings.
ii) Cocoa bean prices remain elevated (although it has eased to USD 7,722/MT on 30 Sep 2024 from USD11,878/MT on 19 April 2024), continuing to pressure margins and working capital.
We don’t view this negative rating outlook as a major concern as it is just reflecting the impact of higher bean prices environment on borrowings level. In fact, we think JB Cocoa is doing pretty well as their cost pass through model allows them to transfer the cost to their clients. This can be proven by JB Cocoa robust financial performance in 1HFY2024 while bean price remains elevated.
Cocoa bean production is expected to recover in 2025
As shown in Chart 1, cocoa grindings have been on an upward trend over the decades, reflecting the rising demand for cocoa despite the volatility in cocoa bean price.
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 may potentially ease the cocoa bean price and reduce the pressure faced by JB Cocoa (eg: finance cost and etc).
Chart 1: Total World Cocoa Grindings (thousands of metric tons)
Solid financial performance in 1HFY24
Based on our previous update in Sep 2024, we highlighted that JB Cocoa’s financials remain solid in 1HFY2024 despite the abnormal fluctuation in cocoa bean prices early this year. This was attributable to its cost pass-through business pricing model, where they are able to pass the cost to the end clients.
In 1HFY2024, JB Cocoa demonstrated robust operation performance, with a 67.2% YoY increase in its revenue. Nevertheless, cost of sales also higher as a result from higher cocoa bean prices, growing to USD391.2 mil from USD 240.7 mil.
JBC recorded an unrealised mark-to-market gain of USD 38.8 million on derivative instruments due to sharp volatility in cocoa bean prices. PBT surged tremendously by 306.6% to USD 43.4 mil compared to the same period in the previous year.
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 terms of credit and liquidity, JB Cocoa’s borrowings increased by 17.6% to USD 318.8 million, driven by higher trade bills and new sukuk issued 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 requires higher trade facility to fund the cocoa beans procurement in the high bean prices environment. It doesn’t mean business is deteriorating.
JB Cocoa’s Total Debt/EBITDA and interest coverage ratio stood at 5.4x and 2.72x respectively, both considered manageable. Although a higher debt/EBITDA ratio may indicate over-leverage, but in this case, it is not indicating the company is struggling to meet its obligations as trade lines facilities have been included. Without these trade lines, the ratio would be lower.
As shown in Table 2, we have excluded trade lines from both short-term and long-term debt. This is because we believe that trade lines do not pose a significant impact on the company’s financial health as they can be refinanced.
Table 2: Credit metrics
USD million | 2022 | 2023 | 1HFY2024 |
Short-term Debt (excluding trade lines) | 19.8 | 4.0 | 4.5 |
Long-term Debt (excluding trade lines) | 18.8 | 41.7 | 60.1 |
Total Debt (excluding trade lines) | 38.5 | 45.7 | 64.6 |
- Trade lines | 138.3 | 225.4 | 254.1 |
Cash and bank balances | 21.6 | 26.3 | 35.7 |
Current ratio | 1.3 | 1.2 | 1.2 |
Operating cash flow | 49.2 | -41.1 | -17.8 |
Net DE ratio (x) | 0.87 | 1.38 | 1.34 |
Total Debt / EBITDA (times) | 5.25 | 11.02 | 5.40 |
Interest Coverage Ratio (times) | 5.05 | 1.59 | 2.72 |
Source: Company’s Reports, iFAST Compilations. Data as of 30 June 2024.
Strong liquidity, decent debt maturity profile
As of 30 June 2024, JB Cocoa’s cash balance stood at USD 35.7 million, comfortably covering its debt obligations maturing in 2025 and 2026 (equivalents to approximately USD 17.4 million). Owing to this, we view that the company’s liquidity remains strong and the management is still actively building up their cash reserves. Hence, we believe the company is well-positioned to meet its debt obligations.
Chart 2: Debt Maturity Profile (excluding trade lines)
Our View
The negative rating outlook by MARC Ratings is just reflecting their concerns that the bean supply shortage and higher bean price persists will lead to higher borrowings. It is not signaling any business deterioration.
Since JB Cocoa’s products (cocoa mass, cocoa butter, and cocoa powder) are essential ingredients in the chocolate-making process, we think that the company is well-positioned to maintain profitability as long as global demand for chocolate remains strong.
Considering JB Cocoa's longstanding experience in the cocoa industry, strong customer base and solid financial performance despite challenging environment, we view that its operations remain healthy.
Additionally, the company’s liquidity remains strong, with current cash levels sufficient to cover debt obligations maturing in 2025 and 2026. We believe the company is actively building its cash reserves to prioritise debt redemption.
Overall, we hold a positive stance towards JB Cocoa’s future outlook.
Why we like this new issuance?
The indicative price guidance is pretty decent in MYR bond space. As shown in the charts below, JB Cocoa’s upcoming issuance offers the highest yield compared to other issuances with the same credit rating and similar tenure.
Together with its robust business model, resilient operating performance and decent credit profile, we believe that its default risk should be under control. Investors could subscribe this new issuance given its higher attractiveness, with indicative price guidance @ 3Y – 5.6% / 5Y – 5.75% area.
*BNM Private Debt is also referring to Corporate Bond/Sukuk. It is used to indicate the expected yield level for such bonds. (eg: based on Chart 3, 3Y A+ bonds are generally expected to be issued at 4.37% area.)
Chart 3: Comparison between 3Y JB Cocoa and other similar issuances
Chart 4: Comparison between 5Y JB Cocoa and other similar issuances
Table 3: Bonds Table
Bonds | Years to Maturity | Yield to Maturity |
3 | Ind yield - 5.6% area | |
5 | Ind yield - 5.75% area | |
1.1 | 5% | |
2.1 | 5.35% | |
2.4 | 5.42% |
Source: BSM, iFAST Compilations. Data as of 17 Oct 2024.
Take Note:
i) Tentatively closing last week of Oct 2024
ii) Listed on BE - Min Inv / Sub - MYR 25,000 / 5,000
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
