This article first appeared in The Edge Financial Daily on October 30, 2019
Johore Tin Bhd
(Oct 29, RM1.39)
Upgrade to outperform with a higher target price of RM1.73: We understand that Johore Tin Bhd has recently increased its capacity for sweetened condensed milk by about 50% to 70% in August to a monthly production of 12,000 tonnes, bringing its estimated annual capacity to about 144,000 tonnes (from about 80,000 tonnes). The facility was shut down for about five weeks during the installation period. The total cost incurred for the new expansion was about RM5 million. We estimate that this has the potential to increase revenue by about RM50 million and net profit by RM4 million, with estimated utilisation of 80%.
To recap, upon commissioning of its new Mexico plant, it is expected to free up about 10% of its current capacity in Malaysia. Nevertheless, this is expected to be filled up by other sales in the local and export markets. At the moment, about 30% of its production is for its own brands (such as Boleh, Tarik-Tarik and Enaak), with the remainder on an original equipment manufacturer (OEM) basis for multiple local and international brand owners. Johore Tin currently has a local market share of about 15%. It is currently trying to promote more of its house brand logo (such as Able Farm) to add more value to the company in the long run.
Construction of the Mexico plant has been completed and it is currently in the process of equipment installation. Its sweetened condensed milk and evaporated milk production facilities are expected to be ready for production by the first quarter of financial year 2020 (1QFY20). In September, Johore Tin increased its stake in Able Dairies Mexico (ADM) to 43.13% from 40%. We understand that the total cost of investment in the Mexico facilities was about US$12 million (RM50.16 million; about US$5 million for a 43% stake).
ADM will have the same production capacity as in Malaysia, with estimated break-even for utilisation to be around 40%. The sales mix of ADM would be skewed a little more towards evaporated milk. It is currently looking at a profit margin of 8% to 10% (FY18 food and beverage margin: 9%). ADM’s target market would be Mexico and nearby countries, especially those that have free trade agreements with Mexico. We expect ADM to contribute positively from the second half (2H) of FY20. At 70% utilisation, we estimate Johore Tin’s 43% stake in ADM to contribute about RM10 million per year in net profit, with all else remaining constant. Meanwhile, Able Packaging Mexico would be involved in can making. It is currently setting up to produce cans for ADM.
We expect Johore Tin’s capital expenditure requirement to be low moving forward upon completion of the Mexico facilities. As at 2QFY19, Johore Tin was in a net cash position of RM50.6 million (with net cash per share of 16 sen). As a result, we adjust upwards our earnings forecasts for FY20 and FY21 by an average of 14%. — PublicInvest Research, Oct 29