Johore Tin Bhd
(Dec 7, RM1)
Maintain trading buy at an unchanged target price (TP) of RM1.23: We met with Johore Tin Bhd’s management with some encouraging takeaways. The construction of a new plant in Mexico is progressing well with the commissioning expected by March 2019. Meanwhile, contribution from its food and beverage (F&B) segment is expected to be sustainable as it plans to focus on the retail milk powder packaging with better margins. We continue to like Johore Tin given a steady demand outlook for condensed and evaporated milk and its opportunity for growth in the dairy business through its 40%-joint venture (JV) in Able Dairies Mexico.

 
Johore Tin is currently trading at 10 times price valuation ratio financial year 2019 forecast (FY19F), with a net cash position of RM56.5 million. We maintained our “trading buy” call on Johore Tin with an unchanged TP of RM1.23. To recap, Johore Tin proposed entry into a 40%-JV with Able Dairies Mexico in April 2017 for the condensed milk business. The remaining stakes (about 43%) are currently held by two of its existing customers and another partner, currently a dairy producer in Mexico, holds about a 17% stake. The new factory under construction is targeted for commissioning by March 2019, with a similar annual capacity as that in Malaysia at about 78,000 tonnes.

We understand the JV will breakeven immediately at 40% of capacity utilisation, with the initial production taken up by existing customers from Mexico, Central America and the US (at about 20%). It expects better margins from the Mexican operations in the absence of import duties and freight costs. The free trade agreement between the US and Mexico will help the JV to penetrate further into the American continent. We understand it has a remaining capital expenditure (capex) of about US$1.2 million (for a 40% stake) for building and machinery. We understand the F&B segment’s recent high margins were mainly due to a better product mix with a higher margin — the retail packaging of milk powders with a margin of 6% to 7%, compared with bulk packaging with a 1% margin previously. To date, its milk powder packing facility is at a 30% capacity utilisation. Going forward, it plans to focus on this retail packaging business offering a better contribution to its bottom line.

Meanwhile, its sweetened condensed and evaporated milk facility is operating at full capacity. Johore Tin plans to continuously increase its capacity for the condensed and evaporated milk segment through upgrading its machinery alongside the current production lines, with a capex of about RM6 million to RM7 million. From FY17, it has increased its capacity by about 15% to 20%.

Upon the commissioning of its plant in Mexico, it expects to release about 20% of the existing capacity in Malaysia, giving Johore Tin more space to take up new orders and cater to existing and new customers’ demands. Management is confident about filling up the free capacity immediately due to strong demand growth from its local and export markets. It also plans to push for more orders before the Mexican plant’s commissioning.

Currently, Johore Tin has a net cash position of RM56.5 million or a net cash per share of 18 sen. With a low capex requirement going forward, a consistent cash flow and a higher cash level of RM86 million as at the third quarter of FY18, we see a potential rise in higher dividend payouts. Top-line growth for the F&B segment is expected to be at double digits, while its tin manufacturing segment to be stable at low single digit growth. A lower volatility in tinplate prices should maintain earnings stability in the near future, while a recovery in milk powder prices may also help to sustain its earnings in the immediate term. — PublicInvest Research, Dec 7