Most publicly traded confectionery players reported healthy earnings growth in their last quarter, raising the question of whether they will continue to do so in coming quarters.
Confectionery stocks have also been considered dividend-generating companies due to their ability to generate free cash flow.
However, at present, the dividends offered by these companies are not that high.
Nonetheless, the ability to post strong growth despite headwinds such as rising commodity prices and a general economic downturn is notable.
Take the case of Apollo Food Holdings Bhd.
In its first quarter ended July 31, 2022 (1Q23), the company managed to report earnings up 26x year-on-year.
The net profit of RM4.6 million (from RM172,000 previously) was attributed to higher sales. Apollo is a household brand in the country known for its chocolate wafers, layer cakes and Swiss rolls.
However, the rise in Apollo’s latest quarterly profit came from a weak base.
In 1Q22, Apollo saw its net profit drop 96.3% due to lower sales and higher raw material costs.
Apollo had disclosed in its annual report that its raw material costs increased by more than 50% in FY22.
Is it a good dividend stock?
At its current price of RM3.80 per share, the company has a dividend yield of 3.95%, according to data from Bloomberg.
That might not be enough to attract dividend seekers, given rising interest rates.
Additionally, the company does not have a dividend policy. However, it has always paid dividends.
It declared a dividend of 35 sen in FY21, although it fell to 15 sen in FY22 as the company faced rising costs.
In 1Q23, the company declared a 10 sen dividend, although management warned of a still challenging environment, resulting from high commodity prices and labor shortages.
Cocoaland Holdings Bhd is another player in the confectionery sector.
Notably, the company is being taken over by Fraser and Neave Holdings Bhd (F&N). In all likelihood, the stock will be privatized by F&N at the takeover price of RM1.50.
At this price, the offer values the company at 2.8 times its book value.
For its last quarter ended June 30, 2022, the group’s revenues and profits increased by 19% and 42.8% respectively compared to a year ago.
Like Apollo, Cocoaland does not have a dividend policy, but it has always rewarded its shareholders.
For FY21, the group declared a dividend of 10 sen per share, while the dividend was eight sen previously.
Cocoaland highlights this in particular in its 2021 annual report: “After taking into account the dividend that has been paid, the total dividend paid over the past 10 years has averaged 70% of profits.
BIMB Securities, in a report on Cocoaland dated Sept. 1, noted that while the latter’s signature gummy products see only moderate demand in 2Q22, net profit and revenue for that quarter increased as the company has a better range of products.
It also manufactures chocolate and hard candy products and has equal contributions to export and local sales.
BIMB has a call to ‘sell’ on the stock due to the fact that Cocoaland produces ‘non-essential’ products that are considered non-recession resistant, associated with higher input costs.
Another player in the industry is Hup Seng Industries Sdn Bhd.
The cookie maker has a dividend yield of 3.3%, according to data from Bloomberg.
From FY15 to FY20, the group paid a constant dividend of six sen per share to shareholders.
However, in FY21, the company reduced its dividend to 2.5 sen per share.
Other locally listed confectionery players include Oriental Food Industries Holdings Bhd, with a dividend yield of 2.8% and Khee San Bhdwhich is in deficit.
An analyst, from a local stock brokerage firm, says publicly traded confectionery companies make good dividend plays during times of inflation.
“Consumers tend to gravitate toward more economical products during inflationary times and toward high-end confectionary products during boom times,” the analyst explains.
However, she remains concerned about rising input costs that are weighing on the profit margins of these companies.
“Costs of inputs like oil and gasoline are rising and it’s eating away at their margins.
“As such, confectionery companies must pass these costs on to consumers. Therefore, as long as commodity prices do not fall, their margins will remain depressed and investors will remain cautious,” explains the analyst.
Analysts also believe that the current inflationary environment is likely to depress demand even for low-priced confectionery products.
“We believe the current inflationary environment will impact consumer sentiment and purchasing power,” BIMB Securities had said in a Hup Seng report dated Oct. 5.
On the positive side, TA Research in a report indicates that the sales outlook for food and beverage (F&B) companies should remain encouraging in the coming quarters.
This is due to the fact that commodity prices have weakened and this has happened after most food manufacturers have completed their cost pass-through via price hikes.
While world prices for corn, soybeans, milk, wheat and palm oil had peaked in the first two quarters of 2022, commodity prices have fallen.
For foodservice companies like F&N, milk represents around 10-20% of the total cost of goods sold.
“According to the Global Dairy Trade, whole milk powder prices are down about 24.9% from their peak in March. The main reason for the decline is due to weak milk powder demand from the largest import market, China,” TA Research said in the report recently.
Wheat and crude palm oil prices also fell 29.3% and 53.1% respectively from a high in May 2022. The research house noted that these are the main commodities premieres of Hup Seng and Nestle Malaysia Bhd..
With the exception of Hup Seng, the research house notes that most catering companies have raised prices by around 5-10%. Hence, Hup Seng is also one of the exceptions among other peers that did not see their margins improving quarter-over-quarter from Q1 to Q2 of 2022.
“Overall, we believe the restaurant businesses under our coverage have completed their cost pass-through after several rounds of price increases,” the research house said.
Additionally, the research house claims that F&B companies that have minimal export exposure are more resilient in a downturn than others. The 2023 budget should also boost companies that have significant local market exposure.
“These include companies like Nestlé (around 80%) and Farm Fresh Bhd (around 85%) as the 2023 budget is expected to support consumers, especially those in lower income groups,” says TA Research.