Johore Tin (8)

F&N's Dairy Division Reported Crazy Profit

Author: Icon8888   |   Publish date: Wed, 4 Nov 2015, 07:57 AM 

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I am overseas now, so I will keep this article short.

Yesterday F&N released its September 2015 quarterly report. Its Malaysia dairy division (which manufactures condense milk, same as Johore Tin) reported revenue of RM271 mil, 7% higher than June 2015 quarter's RM253 mil.

However, operating profit jumped by a massive 57% from RM19.97 mil to RM31.4 mil in the September quarter. 

Operating margin for that division improved from 7.9% to 11.6%.

F&N attributed the strong performance to low raw material cost.

Can Johore Tin follow suit and deliver same type of performance in coming quarter ? We will soon find out by end of this month. 

Stay tuned and sit tight. The rocket is about to take off.

Johore Tin (7)

Finally Delivered A Strong Set Of Results

Author: Icon8888   |   Publish date: Wed, 26 Aug 2015, 09:48 PM 

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Johore Tin Bhd (JOHO) Snapshot

Open 1.24		Previous Close 1.24
Day High 1.28		Day Low 1.24
52 Week High 04/3/15 - 1.65		52 Week Low 08/25/15 - 1.21
Market Cap 119.4M		Average Volume 10 Days 39.8K
EPS TTM 0.20		Shares Outstanding 93.3M
EX-Date 07/1/15		P/E TM 6.3x
Dividend 0.04		Dividend Yield 2.73%

Johore Tin released its June 2015 quarterly result today. 

With net profit of RM6.7 mil, latest quarter EPS is approximately 7.2 sen.

After several quarters of disappointment, I am extremely pleased with the results.

With raw material cost continued to be low and Ringgit weak (which augurs well for the group as it exports more than 70% of its products), the latest quarter's strong performance should be sustainable. I expect the group to continue to perform well going forward. 

Based on annualised EPS of 28.8 sen and latest share price of RM1.28, prospective PER is 4.4 times only.



In the March 2015 quarter, Johore Tin's balance sheet deteriorated and alarmed investors.

However, in this latest quarter, there is clear improvement, with various important figures reverting to historic norm.     



(a) Inventories    In March 2015, inventories spiked to RM148 mil. The ratio of Inventories / Revenue increased to 1.63 times, siginficantly higher than the historic norm of 1 to 1.2 times. This high level of inventories alarmed many investors as they questioned the rationale for stockpiling.

Fortunately, in this latest quarter, inventories had declined to RM112.7 mil. This level is considered reasonable as it is 0.99 times of revenue, in line with historic norm.


(b) Borrowings    In the latest quarter, total borrowings declined to RM77.8 mil, 25% lower than the previous quarter's RM104.4 mil. This is definitely a positive development. Net gearing is at a very comfortable 0.29 times. 


Concluding Remarks

I very seldom explicitly recommend my readers to take position in a particular stock. Usually I will drop hints here and there if I feel that it makes sense to invest.

However, for this particular stock, I encourage you to have some exposure. My cost is approximately RM1.50. You are more lucky than me as you now have opportunity to buy at RM1.28.

But of course, investment is an art, not exact science. So please don't blame me if you loss money in the future.

Buy at own risk.  

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p/s : If you want to learn more about this company, please refer to the articles below.

http://klse.i3investor.com/blogs/icon8888/56747.jsp


http://klse.i3investor.com/blogs/icon8888/69682.jsp


http://klse.i3investor.com/blogs/icon8888/77717.jsp


http://klse.i3investor.com/blogs/icon8888/78002.jsp


http://klse.i3investor.com/blogs/icon8888/77977.jsp


http://klse.i3investor.com/blogs/icon8888/80421.jsp

Johore Tin (6) - Raw Material Price Has Dropped To Ridiculously Low Level

Author: Icon8888   |   Publish date: Mon, 27 Jul 2015, 08:35 PM 

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Recently, the price of skim milk powder and sugar, the main raw material used by Johore Tin for its evaporated milk, condensed milk and other dairy products, has declined to level never seen before.


(Price of skim milk powder recently declined to USD1,702 per MT. In 2013, it used to trade as high as USD5,000 per MT)



(Sugar price has also declined to 5 year low)


All eyes on coming quarter results. The group might benefit from lower raw material cost. However, they have some US Dollar liabilities that might result in forex losses. In the meantime, they export 75% of their products.

Johore Tin (5)

Dairy Division Is Actually Doing Quite Well

Author: Icon8888   |   Publish date: Sat, 6 Jun 2015, 09:57 AM 

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1. Introduction

Johotin has an eventful year in 2014. For the first time in many years, it reported a loss in the June 2014 quarter due to quality issue. In the subsequent quarters, its revenue jumped substantially as it pushed into new markets. While benefiting from lower raw material cost, it was adversely affected by forex losses. The group ended the year with net profit of RM13.0 mil, representing a decline of closed to 35% as compared to previous two years.

Its roller coaster performance over the past few quarters gave rise to many questions. How have its various divisions performed ? Beyond all those exceptional items, is the group's business fundamentals still intact ? What are the things to look out for in the coming quarters ? What kind of earnings should we be expecting ?

Before we proceed to answer the above questions, it is important for us to get to know a new member of the Johotin family - Able Food Sdn Bhd ("Able Food"). This new subsidiary has had a material impact on the group's profitability in FY2014. How the Johotin Group will perform in the future will to a large extent be determined by the profitability of Able Food.


2. Able Food

Able Food is not to be confused with Able Dairies Sdn Bhd ("Able Dairies"), which was acquired by Johotin in 2011 and produces creamer, evaporated milk, condensed milk, etc.

Able Dairies is fully owned by Johotin. It has been the major contributor to group earnings. Out of average group profit of approximately RM21 mil per annum (FY2012 and FY2013), approximately RM15 mil was from Able Dairies.

Able Food is a relatively new entity. It was acquired by Johotin through subscription of 80% equity interest on 2 December 2013 for cash consideration of approximately RM0.8 million. 

According to its website, Able Food is a milk powder manufacturer and packer. It imports milk power from overseas, mix it with supplements and ingredients before shipping the end products to mostly overseas customers.






Subject to further investigation, it seemed that Able Food commenced operation in the middle of 2014 (after being acquired by Johotin as a shell company in December 2013).
It is very likely the main reason for the spike in overall group revenue during the September and December 2014 quarters (from RM60 mil to RM90 mil per quarter). 

According to FY2014 annual report, Able Food reported net loss of RM4.8 mil in FY2014. Its losses was the main reason why Johotin Group's FY2014 profitability declined substantially.   


3. Johotin Group's Historical Performance

The table below sets out Johotin Group's P&L over past 3 years. Please read the notes below the table for further details. For example : if you see "(a)" in the FY2012 table, please scroll down the article to read the explanation (a).

(RM mil)	Tin	Able Dairies	Able Food		Consolidated
FY2012	Division	Sd Bhd	Sd Bhd	Others	P&L
Revenue	82.0	164.3	0.0	0.0	246.3
PAT	7.9	17.2	0.0	(2.2)	22.9
MI	0.0	0.0	0.0	0.0	0.0
Net profit	7.9 (a)	17.2 (b)	0.0	(2.2)	22.9
Net margin (%)	9.7	10.5			9.3
(RM mil)	Tin	Able Dairies	Able Food		Consolidated
FY2013	Division	Sd Bhd	Sd Bhd	Others	P&L
Revenue	83.1	158.3	0.0	0.0	241.4
PAT	8.5	13.5	0.0	(1.5)	20.5
MI	0.0	0.0	0.0	0.0	0.0
Net profit	8.5 (a)	13.5 (b)	0.0	(1.5)	20.5
Net margin (%)	10.2	8.5			8.5
(RM mil)	Tin	Able Dairies	Able Food		Consolidated
FY2014	Division	Sd Bhd	Sd Bhd	Others	P&L
Revenue	88.9	169.7	58.2	0.0	316.8
PAT	9.1	9.6	(4.8)	(1.9)	12.0
MI	0.0	0.0	1.0	0.0	1.0
Net profit	9.1 (a)	9.6 (c)	(3.8) (d)	(1.9)	13.0
Net margin (%)	10.2	5.7	(6.6)		4.1

	Tin	Able Dairies	Able Food		Consolidated
Q1 of 2015 ^	Division	Sd Bhd	Sd Bhd	Others	Figures
Revenue	20.9	42.4	27.5	0.0	90.8
PBT b4 EI	1.3	3.2	3.9	(0.4)	7.9
EI	0.0	(2.7)	0.9	0.0	(1.8)
PBT	1.3	0.4	4.8	(0.4)	6.1
Tax	(0.3)	(0.20)	(0.9)	0.0	(1.391)
PAT	1.0	0.2	3.7 (e)	(0.2)	4.725
MI	0.0	0.0	(0.7)	0.0	(0.743)
Net profit	1.0	0.2	3.0	(0.2)	3.982
Net margin (%)	4.8	0.5	10.8		4.4

^ estimated figures arrived at by making various guesses, assumptions and working backwards

Some key observations :-

(a) Tin manufacturing division's revenue and profitability has been flattish. Over past three years, they generated average revenue and net profit of RM85 mil and RM8.5 mil per annum respectively. Average net margin has been approximately 10% per annum.   

(b) In FY2013, Able Dairies' revenue dropped from RM164.3 mil to RM158.3 mil (a decline of 3.7%). However, its net profit dropped from RM17.2 mil to RM13.5 mil (a decline of 22%).
The drastic drop in net profit was due to lower net margin (8.5% in FY2013 vs 10.5% in FY2012), which was very likely caused by higher milk powder cost (and other raw material).

FY2012 milk powder price of USD3,108 per MT (estimate) was 27% lower than FY2013 milk powder price of USD4,267 per MT (estimate).  

(c) Able Dairies reported net profit of only RM9.6 mil in FY2014. That was because it paid compensation of RM8 mil (estimate) for quality related problems. If the RM8 mil is added back (and adjust for 23% tax), net profit would be RM15.7 mil. Net margin would be 9.2%. This is consistent with net margin of 10.5% and 8.5% in FY2012 and FY2013 respectively.  

FY2014 milk powder price of USD2,625 per MT was 38% lower than FY2013 milk powder price of USD4,267 per MT.

(d) Able Food commenced operation in mid 2014. It reported a loss of RM4.8 mil in FY2014, of which RM3.8 mil attributable to Johotin (pursuant to its 80% stakes).

According to FY2014 annual report, Able Food has low fixed assets. This implies that it does not have its own manufacturing facility.


This is consistent with what Johotin MD told The Edge in the October 2014 interview :-

"Currently Able Food is engaging third party packers to pack the retail packs. Once the factory is ready in the second / third quarter of next year, it will do most of the packing in house. Hopefully, we can rake in revenue of USD4 mil and USD5 mil a month once it is fully functional."

Based on exchange rate of lets' say 3.3 during the time of interview, USD4 mil is equivalent to RM13.2 mil. This translates into quarterly revenue of closed to RM40 mil. For comparison purpose, Able Food reported revenue of RM58 mil in second half of FY2014. This works out to be RM29 mil per quarter.

Able Food is currently building a new manufacturing facility in Selangor (next to Able Diaries) for a cost of RM18 mil. The group targets completion by Q3 2015. This new manufacturing facility is expected to improve Able Food's profit margin as it will no more outsource the packaging operation to outsiders.

That is why in the FY2014 annual report, the company made the following bold statement :-

"Upon completion of F&B segment's manufacturing capacity by Q3 of 2015, production efficiency and pricing competitivenss will be increased and improved significantly."

(e) The company did not explain why Able Food reported such a huge loss of RM4.8 mil upon commencement of operation in H2 FY2014. One possible reason is that it needs to undertake promotional activities to create brand awareness.

In any event, it seemed that Able Food made a decisiive turnaround in the latest quarter ended March 2015 by reporting PAT of RM3.7 mil (I arrived at the figure by dividing MI of RM0.743 mil by 0.2, which represents the 20% minority stakes in Able Food not held by Johotin).

In my opinion, in the absence of promotions and discounts, it is only natural that Able Food will be doing well. Milk powder price is currently at 5 year low of USD2,500 per MT (vs peak of USD5,000 per MT in 2013). As Able Food's business model involves buying bulk (at low international price) and resells to consumers in package form, the profit margin should be quite attractive.


4. Concluding Remarks

(i) I am pleasantly surprised by the outcome of the analysis as it churns out more useful insights than I originally expected. This allows me to have better understanding of the Group. 

(ii) For the tin manufacturing division, I would be happy if it can produce annual net profit of approximately RM8 mil regularly. All evidences point to a matured market with intense competition. This division has recently commissioned a RM15 mil new printing line. The company hopes to offer the services to Middle Eastern and African customers. Lets see whether they can execute as planned. 

(iii) The dairy division traditionally reports net profit ranging from RM12 mil to RM17 mil (depends on amongst others, raw material price).
This division has actually done quite well in latest quarter with PBT of RM7 mil (excluding net forex loss of RM1.8 mil). Based on 24% tax rate, net profit would have been approxmiately RM5 mil. If annualised, it would be the highest ever recorded (at RM20 mil).
Of course, it is too early to celebrate. The strong result in March 2015 was primarily due to Able Food's contribution. Too little is known about this new entity. We need to monitor next few quarters performance to see whether earnings momentum can be sustained.

(iv) One of the most frequently heard complains is the group's failure to hedge its forex exposure. A few million Ringgit here and there can add up to a lot of money. And it is also irritating as earnings would have been stronger, share price higher and my wallet fatter, if they have managed it properly   :  )

Johore Tin (4)

Some of My Thoughts On High Inventories

Author: Icon8888   |   Publish date: Fri, 5 Jun 2015, 11:27 AM 

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One thing that caught many people's attention is the spike of inventories since September 2014. From RM74.1 mil as at June 2014, inventories increased to RM130.7 mil as at December 2014, an increase of RM56.6 mil (and further increased to RM148.2 mil as at March 2015). There are many questions to be asked.


1. Additional Inventories For Whom ? 

We can more or less rule out the possibility that the additional inventories are for the tin manufacturing division.
According to the latest annual report, the tin manufacturing division's total assets increased from RM140.6 mil in FY2013 to RM149.5 mil in FY2014, an increase of RM9 mil only.
On the other hand, the F&B division's total assets increased from RM86.2 mil in FY2013 to RM206.5 mil in FY2014, an increase of RM120.3 mil.
In my opinion, the above data is sufficient for us to conclude that the additional inventories are for the F&B division.
This is actually a good news. The tin manufacturing division has not been reporting revenue growth at all. I would be very worried if the massive inventories build up is for this division (rows of unsold tins & cans would have freaked me out). The F&B division on the other hand, has been growing by leaps and bounds. It is only natural to have a higher level of inventories.      


2. Is The Build Up Rational ?

According to the table below, the group traditionally holds inventories sufficient for approximately 25% of its annual revenue, which is equivalent to 3 months sale.
This is logical as planning horizon of 3 months coincides with the Bursa quarterly financial reports. And also, there is no need to unnecessarily hold large amount of perishable goods that ties down cash flow for no good reason.
Under normal circumtances, it seemed that 3 months inventories is the optimum level.    
However, the spike in inventories recently saw the ratio jumps to 40%, which is almost half a year of revenue.

(RM mil)	FY2012	FY2013	FY2014	Mar2015
Revenue	246.4	241.4	315.5	90.8
Inventories	49.7	58.3	130.7	148.2
Inventories / revenue (%)	20.2	24.1	41.4	40.8 *

* based on annualised revenue

The company did not provide explanation for the build up. The only logical explanation is that they are trying to take advantage of the recent low raw material price to stockpile as much as possible.




My guess is that this will be particularly beneficial for its milk powder packaging business (a new division, more details later), which involves buying milk powder in bulk from international market (currently at low price), simply split them into smaller packages and sell to retail customers (mostly overseas).

As a Malaysian, one thing we know very well is that when commodity prices go up, prices for consumer items will be allowed by the government to go up. However, when commodity prices come down, have you ever seen prices for those consumer items come down ? It never happens.

Maybe from the company's point of view, it is a no brainer to stock up to arbitrage ?

Of course, that is merely my speculation. There isn't sufficiant data to conclude that this is indeed the case. As a shareholder of Johotin, I inevitably will have positive bias and wishful thinking for what the company does. A such, please take whatever I said with a pinch of salt. Having said so, I feel that at current low price environment (backed by possible fat margin, if my hypothesis above is correct), there is not much downside for stocking up. It is indeed a no brainer.      


3. Funding Cost

It is fine to hold a higher level of inventories for arbitrage (if my hypothesis is correct). But it won't come free. The additional inventories will have to be funded by loans.

Pursuant to quarterly reports, it seemed that the company is making use of short term trade facilities for that purpose (Trust Receipts).

The company's decision to stockpile has to take into consideration additional interest expenses. The benefit of lower raw material price must outweight its funding cost in order to make sense. Fortunately, short term facilities usually carries quite low interest rate. I think the company should have plenty of room for manouver as far as economics is concerned.


4. When Will This End ?

If the rationale for the stockpiling is to lock in raw material at low cost, this practice should logically persist until the raw material cost has gone up to a level that it is not justifiable to conitnue to do so anymore.

(Or should it be the other way ? If strong evidences surface to indicate that that raw material price will remain low for an extensive period of time, maybe there is no need to stockpile at all ?).     

To be honest, I have no idea when inventories level will return to normal. The only way is to question the management in the forthcoming AGM. Can somebody do that and report back to this forum ?    :   )


5. Not To Be Confused With A Stockist

Last but not least, I would like to highlight a very important point - the company's recent stockpiling of inventories should not be confused with that of a stockist.

Johotin's business operation remains that of a manufacturer. It buys raw materials, processes them and then sells the end products to customers.

A stockist like Pantech and Engtex (their respective trading division) is different. A trading business will have to stockpile HUGE RANGE of inventories in order to meet customers different needs at different time. This kind of business model needs to have high inventory level on PERMANENT BASIS.

If my hypothesis that the purpose is to lock in low cost raw material is correct, Johotin's recent stockpiling is of different nature. It is more optional, rather than mandatory. And it is being done with an opportunity for handsome economics gain. If that is the case, there will be a point in the future the position will be unwind, with the liabilities extinguished and cash freed up.

Hopefully this is the case. 

Johore Tin (3)

Massive Push Overseas Beginning to Bear Fruits ?

Author: Icon8888   |   Publish date: Tue, 2 Jun 2015, 01:14 PM 

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Johore Tin Bhd (JOHO) Snapshot

Open 1.54		Previous Close 1.55
Day High 1.55		Day Low 1.53
52 Week High 07/30/14 - 1.83		52 Week Low 12/11/14 - 1.30
Market Cap 142.8M		Average Volume 10 Days 162.4K
EPS TTM 0.13		Shares Outstanding 93.3M
EX-Date 07/1/15		P/E TM 12.0x
Dividend 0.04		Dividend Yield 1.31%

Quarter Result:

F.Y.	Quarter	Revenue ('000)	Profit before Tax ('000)	Profit Attb. to SH ('000)	EPS (Cent)	DPS (Cent)	NAPS
2015-12-31	2015-03-31	90,778	6,115	3,981	4.27	3.50	1.9800
2014-12-31	2014-12-31	104,661	6,648	5,216	5.59	-	1.9400
2014-12-31	2014-09-30	90,661	3,996	2,962	3.15	-	1.8800
2014-12-31	2014-06-30	58,757	-548	-334	-0.27	-	1.8700
2014-12-31	2014-03-31	61,454	7,625	5,132	5.44	2.00	1.8700
2013-12-31	2013-12-31	64,577	4,928	3,920	4.20	-	-
2013-12-31	2013-09-30	63,473	8,167	5,433	5.89	3.00	1.8100
2013-12-31	2013-06-30	61,540	7,764	5,660	6.06	-	1.7900
2013-12-31	2013-03-31	51,794	6,289	5,572	5.97	4.20	1.7300

1. Massive Growth In Revenue 

Johotin's revenue traditionally has been around RM60 mil per quarter. However, since September 2014, its revenue has increased by closed to 50% to RM90.7 mil per quarter. The massive growth was driven by the dairy products division which saw revenue jumped from RM37.3 mil to RM69.6 mil, an almost 100% increase.

According to the just released FY2014 annual report, the group's dairy division reported strong growth in Asia (27%) and Central America, a new market that previously did not exist. 

(Sales to Africa has declined, which is unusual for a continent that is experiencing strong economic growth. My guess is that it was due to Ebola crisis, which affected West Africa, where Johotin ships most of its products)


2. Impact On Profitability

One thing that worried me in the September and December 2014 quarters was the lack of growth in dairy division's profitability despite masive revenue growth. However, in the latest March 2015 quarter. it seemed that the additional revenue has finally trickled down to bottomline, with dairy division's PBT increasing from the traditional RM4.5 mil to RM7 mil. 
 

(RM mil)	Mar14	Jun14	Sep14	Dec14	Mar15
Revenue	61.4	58.8	90.7	104.7	90.8
> Tins & Cans	21.5	21.5	21.1	24.7	20.9
> Dairy Products	39.9	37.3	69.6	80.0	69.9
PBT	7.63	(0.55)	4.0	6.7	6.1
> others	(0.3)	(0.5)	(0.4)	(0.4)	(0.4)
> Tins & Cans	3.4	3.3	1.3	4.1	1.3
> Dairy Products	4.5	(3.4)	3.0	3.0	5.2
adjustments :-
> Tins & Cans	0.0	0.0	0.0	0.0	0.0
> Dairy Products	0.0	(7.0) **	(1.0) **	(1.7) #	(1.8) #
adjusted PBT :-
> Tins & Cans	3.4	3.3	1.3	4.1	1.3
> Dairy Products	4.5	3.6	4.0	4.6	7.0
adjusted PBT margin (%)
> Tins & Cans	15.8	15.4	6.3	16.6	6.3
> Dairy Products	11.3	9.7	5.8	5.8	10.1

** compensation due to quality issues
# forex losses

In the latest quarter, tins & cans division reported PBT of RM1.3 mil, a significant decline as compared to previous quarters. The company attributed that to lower sales of biscuits tins as well as higher raw material cost pursuant to strengthening of USD vs RM.

On the other hand, the dairy division reported PBT of RM5.2 mil, an increase of RM2.2 mil compared to previous quarter.
According to the company, this division benefited from lower raw material cost as well as more favorable foreign currency translation (every USD sales generates more RM).
The company also mentioned that the dairy division was affected by Realised Forex Loss. According to March 2015 quarterly report, realised forex loss was RM2.73 mil. However, there was also an unrealised forex gain of RM0.93 mil, which I suspect has already been factored into diary division's PBT. In order not to overstate dairy division's profitability, I have added back only the net amount of RM1.8 mil (being RM2.73 mil less RM0.93 mil) to diary division's PBT, thereby arriving at PBT of RM7 mil.
Jut to cross check, the PBT margin for the RM7 mil of 10.1% is consistent with previous margin of approximately 10% as per March and June 2014 quarters.





3. Impact On Balance Sheet

It is common sense that as size of business operation grows, one should expect funding needs to increase, in particular for working capital purpose. The same happens to Johotin. It saw a massive jump in short term borrowings in the latest two quarters from RM35.6 mil to RM95 mil, an increase of RM59.4 mil. 

(RM mil)	Mar14	Jun14	Sep14	Dec14	Mar15
Revenue	61.4	58.8	90.7	104.7	90.8
> Tins & Cans	21.5	21.5	21.1	24.7	20.9
> Milk Products	39.9	37.3	69.6	80.0	69.9
cash	40.5	38.7	31.1	25.5	28.9
LT borrowings	14.1	12.9	11.7	10.5	9.4
ST borrowings	20.2	32.9	35.6	58.8	95.0
net borrowings	net cash	7.0	16.1	43.7	75.5
shareholders funds	174.8	174.4	175.5	180.8	184.8
net gearing (%)	net cah	4.0	9.2	24.2	40.8
inventories	63.1	74.1	81.8	125.0	148.2
receivables	42.0	47.7	44.3	73.5	45.7
payables	19.1	26.8	24.7	65.9	30.2

Any spike in borrowings warrants attention. London Biscuits is a classic example of high borrowings went awry. The company gears up to spend on expensive plants and machinery, without corresponding increase in proftiability. The end results is disastrous, with significant destruction in shareholders value.

According to Johotin's FY2014 annual report, increase in short term borrowings was due to higher Foreign Currency Trust Receipts (increased from RM9.7 mil in FY2013 to RM49.5 mil in FY2014).

According to internet sources, a Trust Receipt is :

"A financing facility that allows the buyer to collect its purchases before making payment to suppliers, as payment to suppliers is advanced by the bank.
The bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for manufacturing or sales purposes." 
  


In my opinion, the increase in Foreign Currency Trust Receipt is related to increases of inventories by RM72.6 mil (from RM58 mil in FY2013 to RM130.6 mil in FY2014).

According to FY2014 annual report, the increase of inventories is due to stocking up of raw materials (instead of unsellable finished goods rottening away at warehouses).    



The increase in inventories could be due to two reasons :-

(a) increases in scale of operations as the group penetrates into new markets in Asia and Central America; and
(b) to capitalise on recent weaknesses in raw material price such as skimmed milk powder, sugar, palm oil and butter fat.

 



4. Concluding Remarks

(a) Johotin attracted my attention primarily due to its ability to grow its overseas sales recently as well as softening of raw material cost.

(b) In the September and December 2014 quarters, dairy division's profitability has not grown much despite almost 100% jump in revenue. However, according to my analysis (which is undertaken by making various guesses and asumptions), this has begun to change. Dairy division's profitability seemed to have made a quantum leap from the previous RM4 mil plus to the RM7 mil level in latest quarter.
One possible reason for previous two quarters' PBT stagnation (despite higher revenue) was that the dairy division was promoting its products in new markets in Asia and Central America to create brand awareness. Build market share first, profit comes later ?
All eyes on next few quarters whether this division can repeat the March 2015 performance and propel group earnings to new height, which will be the catalyst for re-rating.

(c) Massive growth in revenue came with side effects - the group saw its short term borrowings increased quite substantially. However, the increase in borrowings was for the purpose of meeting working capital requirement, which is only natural when sales has expanded so dramatically. At least the borrowings is not used for funding massive capex that has long gestation period and tie down cash over a long period of time. 
In my opinion, as long as the group can manage its receivables properly (namely, no spike in bad debts), these working capital related short terms borrowings should be manageable as receipt of payment from customers could be used to service debt obligation on rollover basis.     
In addition, short term borrowings has lower funding cost. As such, the net effect to profitability should be positive (ie, interest expesnes won't overwhelm incremental profit arising from additional sales).
Having said so, I would be careful not to pretend that it is perfectly ok to have higher borrowings. It is definitely something that need to be monitored closely going forward. I also wonder whether there is a need for cash call to resolve this issue once and for all ? Maybe a rights issue or a placement in the near future ?