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Marc Djandji, CFA is the Editor-in-Chief of The ASEAN Insider, a subscription-based monthly investment newsletter committed to finding compelling investments backed by powerful structural trends in Southeast Asia. He is also a co-Founder and Partner of ASEAN Strategy Group Ltd., an independent... More
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  • Johore Tin Worth A Second Look  0 comments
    Mar 20, 2013 8:09 AM

    Johore Tin Worth a Second Look

    Malaysian tin can and container industry has been confronting challenges like volatile raw material prices, scarce raw materials, heavy domestic competition and substitution threats. Further looking at overall growth rates, the tin can industry has attained maturity and saturation.

    Thanks to its 2011 acquisition of Able Dairies Bhd, Johore Tin Berhad (7167.MK) has moved closer to the F&B market, than the traditional tin can business. Prior to the acquisition, tin cans and containers were the main revenue and profit contributors. The company is now involved in sweetened and condensed milk.

    As it successfully worked out the kinks of its post-acquisition integration, contributing c.RM164m, the F&B segment's represented c.67% of FY12 total sales. Net profit from dairy reached c.RM14m or c.60% of full year total sales.

    Whereas, its smaller size compared to larger players such as Kian Joo Can and Can-One had been a concern, for market share and valuation. Its ~RM170m in market cap and strong fundamentals, have turned Johore Tin into an attractive M&A target.

    (click to enlarge)

    INVESTMENT RATIONALE:

    1. Higher PEx justified from valuation rerating as the company becomes an F&B player rather tin can manufacturer:

    Its smaller size (compared to large players such as Kian Joo Can and Can-One, two of the larger and dominant players) which has been seen as concern (for valuation and tap growth potential) till recently seems to be proving positive now. Johore Tin's acquisition of F&B player Able Dairies Sdn Bhd in Oct 2011, increased its exposure to F&B. With most of its top and bottom lines currently coming from dairy, JTB is increasingly a pure play F&B that owns a tin packaging division. Hence it would not be an exaggeration when in near future we see JTB valuation to be more tied/ aligned towards F&B sector valuation or at least seeing its P/E band improved to higher levels.

    (Source: OSK Research report dated 01 M

    Other KLSE-listed F&B players, such as Fraser & Neave (FNH.MK), Dutch Lady Milk Industries (DLM.MK) suggest an industry average of >20x next year's EPS. Similarly the Malaysian tin can sector trades at an average of about 8x FY13E EPS.

    Trading at 6.2x FY13E EPS, the market continues to value Johore Tin like a tin manufacturer while its F&B segment drive its growth and profitability. At a discount to its tin peers, it's as though the market is punishing Johore Tin for dairy exposure. As the market realises the integration has been completed successfully, I expect in the near future to see Johore Tin's valuation be more aligned with other dairy companies. Johore Tin's future growth and ability to tap growth potential will be key for triggering rerating or further improved/ higher multiple band.

    Further, one cannot ignore the fact that JTB could be a potential M&A target given its strong fundamentals and small market cap of RM167.95m (dated 09-03-13).

    1. Able Dairies acquisition and capacity expansion in F&B segment to drive overall revenue and margins:

    The acquisition of Able Dairies proved a correct decision based on recent top and bottom line performance. Able Dairies' growth is driven by:

    1. Strong demand for condensed milk in third-world countries as a substitute for milk, future growth for this segment is ensured. Close to 80% of Able Dairies sales are generated from exports to West Africa (c.50-60%), the Middle East, and South East Asia. A recent report from Tetra Pak suggests that liquid dairy consumption in Africa will rise from 15.6bn in 2011 to 17.3bn litres in 2014.

    (Source: Tetra Pack's Dairy Index, 5th Issue)

    1. Further with US easing sanctions on Myanmar, Able Dairies has set up plans to tap the potential demand for sweetened and condensed milk.
    2. Management is planning to enter evaporate milk in its product portfolio. Able Dairies already own a machine which has not yet been utilised. New launches in a growing market should not only be positive for volume growth and market share but also strengthen its pricing power.
    3. Given the continued higher demand potentials for its sweetened and condensed milk, Johore Tin recently acquired 1.63ha of land to set up new factory, a warehouse facility and purchase new production lines. It recently raised c.RM29.86m through a rights and warrants issue for the aforesaid purposes. As on date status of the said project is as follows:

    (Source: 4Q12 results from company)

    If things go as planned, new capacity should go online by 1H13. Management indicates that new machinery and equipment could double capacity which will significantly boost Able Dairies contribution by the end of the year.

    1. Tin can segment continues to provide cash flow visibility:

    Despite weaker prospects and lower growth for its tin can segment relative to its F&B segment, the tin can segment provides a stable and visible cash flow. Going forward Johore Tin can push in new territories for tin can products where Able Dairies is already present and this should help bolster tin segment.

    1. Strong balance sheet with sound financial position:

    Johore Tin has a total debt of RM34.4m as per 4Q12 results and a cash and cash equivalent of RM49.6m, leading to the net cash position of c.RM15.2m. With a debt-to-equity ratio of 0.22 and positive cash flows from operations, Johore Tin should continue to benefit from strong a net cash position in the future. Its unlevered balance sheet (net basis) provides the potential to exploit further growth opportunities.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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