KUALA LUMPUR: Johore Tin Bhd has “put behind” it the product quality issue encountered by one of its condensed milk customers that cost it some RM8 million in compensation in the second quarter ended June of financial year 2014 (2QFY14), and is now revving up its milk powder business and venturing into the manufacturing of retail packs for milk powder as its next “growth catalyst”.

And it is doing so with a spanking new RM17 million to RM18 million factory in Teluk Panglima Garang, Selangor.

In an interview with The Edge Financial Daily, chief executive officer Edward Goh said the product quality issue, which resulted in the company reporting a net loss of RM256,000 for 2QFY14 — its first quarterly loss since the only full year loss in FY07 — has been resolved and the compensation amount has mostly been paid up.

“We paid [it] off in cash and replacement stocks. There might be some ‘spill-over’ of the compensation incurred in our 3Q results, but it will not appear in our 4Q results,” he said.

As Johore Tin has been replacing cargos and not invoicing them, the cost of sales for 2QFY14 ballooned to RM53 million, from RM46.5 million previously, while revenue fell to RM58.8 million from RM61.5 million.

“It was actually a very simple contamination through our process line, where there was excessive water used to wash the cans, and the cans were not totally dry when they were passed through the dryer. This resulted in some water residue inside the cans where some yeast was found,” Goh explained.

Regardless of this issue, Goh said the group is still looking at an overall net profit of RM19 million to RM21 million for the full FY14, a little higher than last year’s RM20.6 million, though below its initial target of RM26 million to RM28 million. Net profit for the first half (1H) of FY14 is now at RM4.8 million.

Its new factory in Selangor that will house its new milk powder packaging venture is being built near its subsidiary Able Dairies Sdn Bhd’s existing factory, which will also help ease the latter’s space constraints.

Johore Tin — via Able Dairies Sdn Bhd and Able Food Sdn Bhd, which it acquired in August 2011 and February 2013 respectively — manufactures and sells condensed milk, evaporated milk, as well as milk powder under its F&B segment. F&B accounted for about 66% of group revenue in FY13, with tin manufacturing making up the remaining 34%.

“Currently, Able Food is engaging third party packers to pack the retail packs. Once the factory is ready in the second quarter of next year, it will do most of the packing in-house. Hopefully, we can rake in revenue of US$4 million (RM13.12 million) to US$5 million a month once it is fully functional,” said Goh.

The 100,000 sq ft factory on the 1.6ha tract of land has a milk packing equipment capacity of about 2,000 tonnes per month. Like its condensed milk and milk powder business, 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.

“With this new venture, we are hoping our F&B segment revenue will hit RM250 million and above by next year [FY15] — from RM158.3 million in financial year 2013 — to account for about 70% of our estimated group revenue of RM350 million,” Goh said.

For FY13, Johore Tin reported a net profit of RM20.6 million on revenue of RM241.4 million, indicating a net margin of 8.6%, which it hopes to maintain.

While Goh still expects an annual 25% revenue growth from its condensed milk business, he said the milk powder business will be the one driving segment revenue growth in FY15 as it is still selling below its target.

He acknowledged there is competition from other countries, but noted that the group has a ready market in the condensed milk business — retail customers — to kick-start the milk powder business.

Competitors in the condensed milk business include Can-One Bhd’s condensed milk business and Etika International Holdings Ltd’s former dairy and packaging business, which was sold to Japan’s Asahi Group Holdings Ltd for RM1.06 billion in April this year.

“The demand [for condensed milk] is always there. If the Japanese did not see the demand, I don’t think they would pay that kind of money for it,” said Goh, who, together with his father, owns a 20% direct interest in Johore Tin.

As for tin manufacturing, Johore Tin is targeting 5% to 10% growth revenue and profit in FY15, which will stem from the commissioning of a new RM15 million six-colour printing machine line three months ago.

Johore Tin sells its tin cans mostly to the local market and Singapore, as they are bulky and have to be mostly airfreighted. But with this new sheet printing machine, the group is eyeing more exports.

“There are many can makers in the Middle East and Africa ... they set up manufacturing lines without printing. We will print the flat sheets, they will cut it, and they will form a cylinder for their cans. This is what we hope to expand our business into,” he said.

On raw materials, Goh foresees prices of tin-plated steel — which have come down in the past months and account for 55% to 70% of its manufacturing costs — to remain stable until the first half of next year.

With last Friday’s closing price of RM1.38 and FY13 earnings per share of 22.07 sen, Johore Tin trades at a historical price-earnings ratio of 6.25 times.

This article first appeared in The Edge Financial Daily, on October 27, 2014.