The next Hybrid Giant ~ Johoretin

1^st of all, Happy Thaipusam to all my friends that are celebrating and Happy holiday to those that are not celebrating. It’s glad that all the counters we blog are still doing ok and hit our target price and don’t forget about D&O that we blog before too!

It’s been quite a while that I didn’t blog due to the busyness of my job, today I am taking the opportunity of Thaipusam holiday to share with you 1 of the research that I’m doing. This company is Johotin. The company has been transforming where it have diversified itself from Tin industry to F&B.

The reason we are looking into this company is because this company is earning USD and they are selling food that are essential to human such as milk powder. On the other hand, they have also got a grow factor which is their newly built factory that is about to operate. This will help to boost the capacity of the company and we will see a jump on their profit which will causes the Investment bank to rerate the company. As a result, we are 1 step ahead of them and that’s how retailer can beat the market.

Business Overview

·        Johoretin is mainly involved in the manufacturing of various tins, cans, other containers, the printing of tinplates and also manufacturing and selling of milk and related dairy products via its subsidiaries.

·         Products include biscuit tins, edible oil and vegetable ghee cans, plastic jerry cans, paints and chemical cans, sweetened/evaporated milk and other processed food cans.

·         One of the three largest tin can producers in Malaysia, though smaller than both Kian Joo and Can One. 

Segments 1Q14 2Q14 3Q14 1Q15 2Q15 3Q15 Tin-can 25.1 25.3 25.13 23.7 24.9 25.0 F&B 44.3 37.8 70.85 77.0 93.1 81.9 Investment holding 0.0 0.0 3.292 0.0 1.0 3.8 Total revenue 69.4 63.1 99.3 100.7 119.1 110.8 Segments 1Q14 2Q14 3Q14 1Q15 2Q15 3Q15 Tin-can 3.4 3.3 -0.8 1.3 2.7 -1.0 F&B 4.5 -3.4 1.9 5.2 7.0 0.4 Investment holding -0.3 -0.5 -0.4 -0.4 -0.5 -0.5 Total operating profit 7.6 -0.5 0.7 6.1 9.2 -1.1

Investment merits

1.     Banking on the F&B segment

·         Recall back in Oct 2011, JTB acquired its dairy product manufacturing business through the acquisition of Able Dairies SB (ADSB).

·         Meanwhile, 80-85% of its products are exported to countries such as West Africa (50-60% of sales) and South East Asia while the remaining 15-20% are for local sales. There is strong underlying demand for condensed milk in third-world countries as a substitute for milk as it is a cheaper alternative.

·         Management is expecting revenues from sweetened condensed and evaporate milk to hover around RM160-180m for the next 2 years, which mainly driven by increased demand from the African region.

·         Current utilisation rates for their plant stands at 85%, and the group will eventually move some of its operations to its new factory to free-up space. Nonetheless, expansion plans for its condense and evaporated milk segment has not been discussed.

·         NP margins for exports stands at around 7-8% while for local is about 10%.

·         Overall, the group sells 180-200 containers (from 120-150 containers back in 2011).

2.     A new revenue stream – milk powder repacking (infant, growing up and whole milk powders) – sell as retail packs

·         Currently, Johoretin is importing formulated milk powder and outsourcing their repacking to third party sellers to sell to third world countries. Unfortunately, due to its capacity and facility constraints the group.

·         PBT margins are currently thin for this segment at 1-2% and revenue approximately RM100-120m/year.

·         Nonetheless, the group’s upcoming new facility, which would cater for its milk powder repacking segment will be completed by Feb-March 2015 and fill be running on utilisation rates of 25%. We understand that the new capacity is able to do 3k tonnes of repacking and the group will be able to formulate the repack the milk powder in-house.

·         Management expects break-even point to be at utilisation rates of 35-40% and expects to ramp up capacity with higher margins of 3-4% by 2H16.

·         This will target the lower-to-middle segment and customers will also cater mostly to South East Asia and Africa (most of its customers are the group’s existing customers).

3.     Steady tin can manufacturing business – business as usual

·         Moving forward, revenue from its tin can business is expected to grow organically at 2-4% and will also grow in tandem with its dairy product manufacturing business.

·         Main clients are Kraft and Lee Pineapple.

·         We understand that the group is working with a potential client with a few projects in the pipeline for its tin can business but no concrete plans as of now.

Small talk

Recently there are some market talks saying the 4^th Quarter result will be as good as the 2^nd quarter result. If this were to be true, then the total EPS for the company will be 4.27 + 7.16 + 3.52 + 7 = 21.95.

(we are not 100% confirm with the rumors, but its good to take a look whether what will happen if it were to be true)

Since the company is a hybrid of Tin and F&B industry, hence we give a conservative calculation of 15 times PE.

21.95* 15 = 329.25

As a result, we might see Johotin to go RM3.29 if it is fully value at 15 times PE.

However, don’t forget about the uncertainties of current choppy market, as a result, I think RM2.5 will be my 1^st target and expect it to go higher with its result on 2^nd Quarter.

To those risk taker out there, you may also take a look on their warrant which you may do some leveraging. However, please do some homework on it. 

Anyhow, this might not happen if the market gone haywire, so please monitor yourself and have a trading plan. Always remember to take care your RISK!

May all the HUAT be with us!

Regards

Big Canon Finance

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