Friday, 23 August 2013

GCB Under Pressure

It is somehow expected that GCB (Guan Chong Berhad) FY13Q2 result will be a disappointing one. For the first half of FY2013, its net profit retreats 64% YoY from RM66.6mil to RM24.0mil while its revenue remains almost the same. QoQ, its revenue drops 18% from RM364mil to RM299mil and its net profit declines as much as 55% from RM16.5mil to RM7.4mil.

While decreasing cocoa demand and lower selling price globally surely affect its revenue and margin to a certain extent, there is another significant reason that cause the downturn in GCB's financial results.

GCB's business and margin jumps significantly since year 2010 coincides with its increasing cocoa grinding capacity, now it seems like it is not a long-lasting one.

From GCB's financial report's notes, all the gain & loss from its currency, commodity future & options contracts are included in its profit before tax. The issue is, these numbers are not small.

GCB seems to have a good year in FY2012, definitely it has. Lets check the report.

       GCB FY2012

For the whole FY2012, GCB's profit after tax stands at RM118.8mil, the net gain from the foreign exchange & other derivatives is RM31.6mil, which comprises 26% of its net profit. (I'm not sure whether the unrealised portion is included in the calculation for its income statement).

However, the investment in derivatives is a double edge sword. You can gain or lose. The turnaround in fate happens starting from the end of year 2012 until now.

Lets check GCB FY13Q2 financial notes.

       GCB FY13Q2

For the first 6 months of FY2013, GCB suffers total loss of RM22.7mil in its investment in derivatives, though most of them are still unrealised. I think this is the main reason its net profit falls 64% in the same period. The problem is, the loss in derivatives seems to get worse with time. 

As one of the largest cocoa grinder in the world, GCB may have a bright future especially when the Europe and US are recovering from financial crisis. Investment in derivatives contracts is essential in business to hedge the risk of price fluctuation. Many companies do this. Whether GCB does it correctly, it is for investors to judge.

       Which GCB is better?

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