Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on November 16 - November 22, 2015.

 

THE aluminium and tin can packaging business may seem unexciting to those looking for robust earnings growth. But believe it or not, metal can manufacturers are seeing brisk sales with some having the happy problem of running out of production capacity. 

The Edge has learnt that Kian Joo has won over some customers from Johore Tin, as the latter does not have sufficient capacity to cater for the stronger-than-expected demand from its clients while it has to give priority to its own dairy products.

This probably helps to explain the increase in investing interest in the likes of Kian Joo Can Factory Bhd, Can-One Bhd and Johore Tin Bhd.  

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Year to date, Kian Joo (fundamental: 2; valuation: 1.50), the market leader with an estimated domestic market share of more than 60%, saw its share price rise 10%, closing at RM3.22 last Thursday. Were it not that the share price is capped at RM3.30 in a takeover offer launched by Aspire Insight Sdn Bhd two years ago, the counter could have gone up even further.

Can-One (fundamental: 1.10; valuation: 1.80), which owns 32.9% equity interest in Kian Joo, also saw its share price gain 83% to settle at RM3.89, while shares of Johore Tin (fundamental: 1; valuation: 1.40) soared 94% to RM2.62.

For the six months ended June 30, Can-One’s net profit jumped to RM38.7 million or 24.77 sen per share, from RM23.8 million or 15.65 sen per share a year ago, while Johore Tin’s net profit more than doubled to RM10.6 million from RM4.8 million or 5.17 sen per share. 

According to theedgemarkets.com, the likelihood of a corporate exercise for Can-One and Johore Tin is high.

Industry experts believe the recent share price rally of metal can producers is mainly due to healthy fundamental prospects, helped by strong demand for dairy products, lower cost of production as well as favourable currency movements.

“The [metal can] industry players can take advantage of the falling raw material prices. The aluminium price is at a record low level now, while steel prices remain weak. Besides, the weaker ringgit is another blessing for companies involved in export activities,” an industry veteran tells The Edge.

Bloomberg data shows that over the past one year, the London Metal Exchange’s three-month forward rolling contracts saw aluminium prices decline by 26% to US$1,518 per tonne (see chart).

It is learnt that tin plates, mainly sold by Perusahaan Sadur Timah Malaysia Bhd (Perstima), the country’s sole manufacturer of tinplate, are now trading at between US$800 and US$900 per tonne. The Johor-based Perstima (fundamental: 2.35; valuation: 2.40) has an annual capacity of up to 200,000 tonnes, while its Vietnam operation has a capacity of 100,000 tonnes per year.

The ringgit, meanwhile, has weakened more than 30% against the US dollar to 4.365, compared with 3.3355 a year ago. While such foreign exchange rates could benefit the export business, on the flip side manufacturers that have imported content would see their input costs escalating as a result of the weak ringgit.

For Kian Joo, more than 45% of its revenue last year was derived from exports, including 30.23% from Vietnam and 5.8% from Singapore.

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In view of the potential forex risk as well as the increase in energy prices and toll rates, according to an industry player, the metal can industry is considering a price hike of 7% to 8% next year, in a move to pass the costs on to customers.

An executive tells The Edge that the metal can industry is considered a sunset industry in the long run. Hence, companies such as Can-One and Johore Tin have diversified into the food industry, dairy products in particular, to rely less on the traditional can manufacturing business.

“We have to accept the fact that metal cans for cooking oil are now being replaced by plastic jerry cans or PET (polyethylene terephthalate) bottles. Biscuit tins are also being replaced by plastic containers, flexible plastic packaging or paper boxes,” he says.

Notably, Johore Tin diversified into dairy products about three years ago by acquiring Able Dairies Sdn Bhd, which produces condensed and evaporated milk.

In 2006, Can-One entered into the production of sweetened condensed milk via F&B Nutrition Sdn Bhd. With the completion of a new plant in 2008, Can-One continues to strengthen its position by adding evaporated milk to its range of products.

Last year, the food products segment contributed 54% to Can-One’s pre-tax profit, while the food and beverage (F&B) division made up 38% of Johore Tin’s bottom line.

“This [can packaging] is no longer an exciting business and the industry lacks a major catalyst. I still like Johore Tin and Can-One, but it is more for their dairy products business, not the traditional business,” an analyst with a local research firm says.

He prefers flexible packaging stocks like Tomypak Holdings Bhd (fundamental: 2.10; valuation: 1.10) and Daibochi Plastic and Packaging Industry Bhd (fundamental: 1.50; valuation: 1.10).

The analyst says most major F&B firms such as Fraser & Neave Holdings Bhd (fundamental: 2.10; valuation: 1.30), Nestlé (M) Bhd (fundamental: 1.35; valuation: 1.50) and Dutch Lady Milk Industries Bhd (fundamental: 2.30; valuation: 1.50), which mainly produce premium dairy products, could be affected by the weak consumer sentiment, thanks to the higher cost of living.

In comparison, smaller players like Can-One and Johore Tin are producing more affordable dairy products, which they export to the highly populated developing countries. For instance, Johore Tin’s Able Dairies sells its products in Africa and exports to the Middle East and Asean.

“Generally, consumers from Indochina and South Africa still prefer affordability,” comments the analyst.

However, some quarters disagree that the metal can packaging business is a sunset industry, as most companies are still busy delivering orders while some are expanding production capacity.

“No, this is not a dying industry and it will never, ever die. Never in the history of this industry has a company gone bankrupt. Imagine when your client portfolio includes Nestlé, F&N and Dutch Lady, while you yourself are also involved in the food industry, you can never go wrong,” he says.

The veteran further says the manufacturing of dairy products delivers fat profit margins. He goes on to say that the prices of major commodities, including crude palm oil, have dropped significantly, but the selling prices of dairy products remain stable.

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Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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