Johore Tin (1)

Adding This Stock To My Portfolio As A Permanent Holding

Publish date: Wed, 14 Jan 2015, 07:57 PM 

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1. Introduction

Recently, crude oil price and Ringgit had declined sharply. I had been busy looking for export oriented stocks to insulate my portfolio from potential domestic weaknesses and to benefit from the strong US Dollars.

This had led me to invest in a few furniture and electronic stocks, some of which had started bearing fruits. However, I feel that my portoflio is now too narrowly focused. This made me a bit uneasy.

I have long known about Johore Tin but have never seriously considered adding it to my portfolio. Recently, I undertook a more detailed study of the group and found that it is exactly what I wanted to invest in at the current macro environment :-

(a) Resilient Industry - Manufacturer of food related products. Not so susceptible to economic downturn.

(b) Export Oriented - In FY2013, approximately 74% of the Group's products are exported. As such, it is relatively independent of Malaysia's economic performance (especially if 2015 is bad). It will also benefit from the strong US dollars.

(c) Strong Fundamentals & Undemanding Valuation - The stock is currently trading at prospective PER of 5 to 6 times (expect next year EPS around 30 sen. Please refer to Section 6 below).

Balance sheet is strong with minimal net gearing.

Paid out good dividend (yield of closed to 5% in FY2013 based on DPS of 7.2 sen and RM1.47 share price).

2. Principal Business Activities 

Johore Tin is  principally involved in the manufacturing of tins, cans, containers and printing of tinplates, as well as manufacturing and selling of milk and related dairy products.

(Tins & Cans)

(Biscuit tins)

(Evaporated milk cans)

(Paint and chemical cans)

(Pineapple cans)

(Plastic jerry cans)

(Processed food cans)

(Condensed milk cans)

(Vegetable oil tins)

(Dairy Products)

Sweetened Condensed Milk - a very thick, sweet product which contains a mixture of whole milk and 40% sugar, heated until 60% of water evaporates. 

Sweetened Condensed Filled Milk - a product resulting from the evaporation of a portion of water from recombined mix of sugar, milk solids and edible vegetable fat.

Full Cream Sweetened Condensed Milk - ia smooth viscous liquid manufactured from fresh milk, which is then standardised, mixed with sugar and pasteurised before evaporating to a minimum of 72.4% solids and 8% butterfat.

Evaporated Milk - a product related with condensed milk, which has undergone water removed and more complex process which is not sweetened. In some countries, unsweetened evaporated milk is far more common than sweetened condensed milk. 

   (Ace)                            (Best)

(Boleh)                            (Ezy Tarik)

(Goolait)                       (Jersey)

(La Rosse)                     (Stella)

(Tarik Tarik)                   (Virgin Chef)

3. Basic Financial Information

Based on 94 mil shares outstanding and share price of RM1.47, Johore Tin has market cap of RM138 mil.

The group has strong balance sheet. With net assets of RM176 mil, cash of RM31 mil and loans of RM48 mil, net gearing is 9.7% only. 

Based on FY2013 net profit of RM21.2 mil, historical PE multiple is 6.5 times only.

(Johore Tin share price)

4. Historical Profitability

(RM mil)	Mac 13	Jun 13	Sep 13	Dec 13	Mac 14	Jun 14	Sep 14
Revenue	51.8	61.5	63.5	64.6	61.5	58.8	90.7
> Tins & Cans	21.4	21.9	20.2	19.7	18.2	24.8	21.1
> Milk products	30.4	39.7	43.3	44.9	43.3	34.0	69.6
PBT	6.3	7.8	8.2	5.7	7.6	(0.5)	4.0
> Tins & Cans	3.9	4.1	3.1	1.9	3.4	3.3	1.3
> Milk products	2.7	4.1	5.3	4.5	4.5	(3.4)	3.0
PBT margin (%)	12.1	12.6	12.9	8.8	12.4	(0.9)	4.4
> Tins & Cans	18.1	18.7	15.5	9.6	18.7	13.4	6.3
> Milk products	8.7	10.3	12.3	9.9	10.4	(10.0)	4.4
Net profit	5.6	5.7	5.5	4.6	5.1	(0.3)	2.9
USD : RM	3.08	3.07	3.24	3.21	3.30	3.23	3.19

Due to the nature of its business, Johore Tin's net profit has been very stable and consistent.

During the past 10 quarters, the group reported net profit of approximately RM5 to 6 million per quarter.

However, in Q2 2014, the group reported a loss of RM0.3 million. This was due to compensation paid to certain customers for defective products. The quality issue spilled over into Q3 2014 (further compensation), causing net profit to stay below average norm.

However, the issue has now been fully resolved (please refer to Section 6 below).

5. Sales By Geographical Locations

According to FY2013 annual report, the group's products are sold to customers at the following geographical locations :-

		2013			2012
	(RM mil)	(%)		(RM mil)	(%)
Africa	80.3	33.2		44.1	17.9
Asia	79.8	33.0		78.1	31.7
Malaysia	62.5	25.9		111.5	45.3
Others	18.9	7.8		12.6	5.1
Total	241.5	100.0		246.3	100.0

Key observations :-

(a) In FY2013, approximately 74% of the products are exported.

(b) Africa is a growth story with sales increased by almost 100% from RM44 mil in FY2012 to RM80 mil.

(c) Malaysia sales has declined from RM112 mil in FY2012 to RM63 mil (reason unknown).

6. Group CEO's Recent Interview With The Press

http://www.bursacommunity.com/t22633-johore-tin-still-bullish-on-dairy

On 27 October 2014, Johore Tin CEO Edward Goh spoke to The Edge Financial Daily regarding the company's operation and prospects. The following are some of the salient points :-

(a) The group is building a RM17 mil new factory in Teluk Panglima Garang, Selangor for manufacturing of retail packs for milk powder (a new growth catalyst).

(b) The quality issue has been fully resolved with final tranche of compensation paid in Q3 2014. No more compensation in coming Q4 result.

(c) the group is still looking at overall net profit of RM19 mil to RM21 mil for FYE 31 December 2014 (originally targeted net profit of RM26 mil to RM28 mil).

(Note : for the 9 months ended September 2014, the group's total net profit is only RM7.76 mil. To achieve RM19 mil net profit, the coming Q4 net profit will need to be at least RM11 mil. This is way above what was achieved in the past of average RM5 to 6 mil per quarter. I am looking forward to the coming quarter result to see how they are going to achieve this. Hopefully they won't disappoint by resorting to cheap tactics such as revaluation of properties, etc)

(d) The group is targeting the export market to account for more than 80% of its new milk powder packaging business, mostly to the Middle East, Africa and Asia.

(e) The group target to achieve revenue of RM350 mil in FY2015.  It achieved net margin of 8.6% in FY2013. The CEO hopes to maintain that net margin.

(Note : does that imply net profit of RM30 million in FY2015, being 8.6% x RM350 mil ?)

(f) in FY2015, the company is targeting 5% to 10% growth in revenue and net profit for its tin manufacturing division, which will be driven by the commissioning of a new RM15 mil six colour printing machine line three months ago. 

(Note : in the latest quarter, the PBT of the tin manufacturing division declined to RM1.3 mil (vs RM3.3 mil in June 2014 quarter). One of the reasons cited was the higher depreciation charges for new machinery. This could be related to the new 6 colour printing line. Hopefully in FY2015, additional revenue will be generated by this new line to offset the higher depreciation charges)

The CEO explained that there are many can makers in the Middle East and Africa which set up manufacturing lines without printing. The group hopes to print the flat sheets for those customers, which will then cut and form a cylinder for their cans. This is where the additional revenue will come from.

7. Concluding Remarks

(a) Being an export oriented company, Johore Tin should benefit from the strong US Dollars. However, things are not as simple and straight forward as that.

The group uses milk powder as raw material for its dairy division. The company's public documents did not disclose whether the milk powder is sourced from domestic or overseas suppliers.

However, since Malaysia is not an efficient producer of dairy products, it is very likely that the milk powder is sourced from overseas. If that is the case, the strong US Dollars would add on to its raw material cost.

However, overall, I believe that the dairy division should still be a beneficiary of strong US Dollars. This is because milk powder only forms part of the production cost. The other items such as labour, cans, depreciaion, electricity, etc are all sourced domestically.

Under the strong US Dollar regime, the milk powder component will break even (buy high sell high) while the domestic cost components will benefit from margin expansion.

(b) At first, I was a bit concerned about the long term consequence of the spoiled milk saga. Will the defective products adversely affect the group's hard earned reputation and brand names (mostly overseas) ? Will that result in the group not being able to effectively market its products going forward ?

However, after giving some thoughts, I realised that the answer to that question has already been made available - The spoiled milk incident occured in Q2 2014 (thereby affecting its revenue in that quarter). However, in Q3 2014, the dairy division's revenue has fully recovered. In fact, it has surpassed historical sales in previous quarters. It seemed that the defective products incident has not had long lasting effect on the group's sale.

(c) Based on preliminary study, it seemed that this group has enormous potential. Their market place is not limited to Malaysia. They have successfully penetrated into Africa and Middle Eastern markets. With proper planning and deployment of additional resources, they should be able to tap into further business opportunities.

For example, as mentioned in Section 6, their interaction with Africa and Middle Eastern can manufacturers led them to notice that there is an opportunity to supply printed plates to them.

(d) Recent setback caused by the quality issue provides opportunity to gain exposure at attractive price. I intend to make this stock a permanent holding. 

Appendix - Recent Newspaper Article