Johore Tin Bhd
(Jan 17, RM1.10)
Downgrade to hold with a higher target price of RM1.20: Johore Tin Bhd (JTB)’s financial year 2018 (FY18) started with an elevated tinplate price of US$950 per tonne (Malaysia tinplate import price), which developed into a volatile price swing in the range of US$790 per tonne to US$1,075 per tonne (FY17 range was US$750 per tonne to US$915 per tonne).
Such swing has distorted JTB’s tin manufacturing segment margins in the short term as product repricing will usually take three to six months for the company to pass on the cost increase to customers.
The operating margin dipped to 10.8% in first quarter of FY18 (1QFY18) at -15.3% percentage points (ppt) year-on-year (y-o-y) and normalised gradually in subsequent quarters to 14.2% in 3QFY18.
For cumulative 9MFY18, the operating margin contracted by 5.2% ppts y-o-y to 13.6%.
We expect margin recovery to improve further in FY18 results, as cost-plus through mechanism is at work. Moving into FY19, management guided that tinplate price is expected to be soft and less volatile, hence providing more stability in the market.
We opine that the price of tinplate is likely to trend lower in 2019 on the back of:
1) ongoing trade war, which may dampen tinplate’s demand, and
2) surge in tin deliverable stock in China.
Our FY18/19/20 tinplate average price estimates are US$1,000/980/980 per tonne.
On the other hand, skimmed milk powder, being the main raw material for evaporated milk, condensed milk and repackaged milk powder, recorded a decrease in average price to US$1,940 per tonne in FY18 from US$2,040 per tonne in FY17 (- 4.9% y-o-y).
The y-o-y decrease in skimmed milk powder price in FY18 was attributable to softer global demand for milk.
As a result, 9MFY18 net margin has shown 1.4 ppts y-o-y improvement to 7.7%, in line with the decline in skimmed milk powder price.
For 2019, in view of increasing milk demand from China and Europe has exhausted their supplies of skimmed milk powder, we expect a ripple effect on JTB’s skimmed milk powder cost as it is expected to increase to US$2,050 per tonne.
Considering the increase in price of skimmed milk powder, we expect the food and beverage (F&B) segment margin to reduce to 6.5%.
We project 4QFY18 earnings of RM6 million to RM11 million backed by:
1) continued production improvement in repackaged milk powder factory, and
2) higher product average selling price.
Looking forward, we are “neutral” on JTB’s outlook, given that:
i) Tin manufacturing segment’s earnings are expected to be supported by resilient demands from biscuit industry, edible oil industry and printing services alongside softer tinplate price, and
ii) F&B sales are projected to be driven by domestic capacity expansion and strategic JV in Mexico.
However, margins may be under pressure as we expect an increasing skimmed milk powder price. — TA Securities, Jan 17