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This article first appeared in The Edge Financial Daily on September 25, 2018

Johore Tin Bhd
(Sept 24, 92 sen)
Maintain buy with a higher target price (TP) of RM1.16:
Management guided 72% of Johore Tin Bhd’s sales are currently derived from exports. As such, the company is concerned about the current US-China trade war, which would likely affect currencies of countries outside the US by reducing purchasing power, especially in the Middle East, Africa and Southeast Asia.

However, this could partially be mitigated by higher export sales to Central America due to an increase in the US dollar’s purchasing power. Note that Central America’s sales account for 9% of the group’s sales in the financial year ended Dec 31, 2017 (FY17).

At the same time, the ringgit is expected to weaken in the second half of 2018. This would likely boost Johore Tin’s export competitiveness but could also increase raw material costs especially given that 100% of milk-based commodities and about 50% of tinplates are imported.

We believe imported raw materials account for about 85% of costs of sales. Overall, based on our sensitivity analysis, if the average ringgit rate weakens from RM4 to RM4.05 per US dollar, Johore Tin’s FY18 earnings could reduce by 3.4%, ceteris paribus.

Management guided the tin manufacturing and food and beverage (F&B) segments are exempted from the sales and services tax (SST). We do not expect material impact on earnings from the change in tax system from the goods and services tax (GST) to SST as approximately 72% of the group’s sales are exported, thus exempted from the GST previously.

Considering 30% of 600 people of the group’s production labour force are earning minimum wage, the increase to RM1,050 per year effective January 2019 is expected to increase Johore Tin’s staff costs by less than 1%. Currently, staff costs account for 7% of the group’s sales.  

Last week, Johore Tin announced it had subscribed for an additional 43.5 million ordinary shares at an issue price of RM1 per share in the capital of Able Dairies Sdn Bhd (ADSB), bringing total investment to RM45 million.

Management guided its ADSB’s joint-venture Mexico plant is expected to complete by end-FY18 with a total capacity of about 60,000 tonnes per year. We can expect commissioning in the second quarter of 2019 (2QCY19) and a 50% utilisation rate by end-FY19 with a focus to up sales in South American, Central American, the Caribbean and African markets.

Locally, Johore Tin plans to allocate RM3 million to add three operational lines within the ADSB evaporated milk and condensed milk plant, which will ramp up the installed capacity by 30% to 78,000 tonnes annually. The operation is expected to reach full capacity by 3QCY19.

In March 2018, Johore Tin announced it had awarded a contract — a single-storey factory with related facilities — for RM14 million. Upon completion by end-FY18, Johore Tin can place additional three lines of capacity. It is also investing in a land and building of a new warehouse in Teluk Panglima Garang budgeted at RM20.5 million.

Considering the aforementioned, we have increased our sales assumptions for FY19 and FY20 by 4.4% and 2.5% respectively as we believe Johore Tin will fill up new spaces and increase capacity in different stages to ensure a healthy cash flow and balance sheet.

We raise our earnings forecasts by less than 1% and 2% for FY19 and FY20 respectively after considering additional domestic capacity for sweetened creamer products and an increase in our capital expenditure assumptions. Maintain “buy” with higher sum-of-parts-valuation of RM1.16 per share based on 16 times F&B earnings and eight times tin manufacturing earnings for 2019. — TA Securities Research, Sept 24

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