We initiate coverage on Johore Tin Berhad (JTB) with an Outperform call and a target price of RM1.86, implying an upside of 36.8% from its last traded price. We like JTB for i) growth opportunities in the milk powder segment, ii) increasing F&B contributions from potential capacity expansion plans in the sweetened condensed and evaporated milk segments, iii) opportunity of growth in the American Continent from new ventures in Mexico, and iv) healthy balance sheet. As such, we believe JTB deserves a higher price to reflect its underlying value.

• Background. JTB is principally involved in two business segments namely tin manufacturing and food and beverage (F&B). It is ranked among the top three largest manufacturers of general tin cans in Malaysia in terms of estimated output capacity per year, behind Kian Joo and Can-One. JTB also engages in the business of manufacturing and selling of milk and related dairy products. The dairy products produced by the Group comprise of sweetened condensed milk and evaporated milk as well as milk powder.

• Profitability expected to grow from milk powder segment. Management expects the utilisation rate of its new milk powder packing factory to increase from 35% in FY17 up to 70% in FY19. At the current capacity utilisation of 15%-16%, we estimate this segment currently generates an operating profit of c.RM2m-3m in 1QFY17. If it manages to achieve a 75% utilisation, operating profits may grow exponentially to between RM50m and RM55m, though this will take a good 3 to 4 years to attain. We anticipate the addition from the profit of Able Food may potentially double Group’s bottom-line (which was just RM35.6m in FY16).

• Opportunities to grow from existing customer base. In the next 6 to 8 months, JTB plans to do some upgrading to its machinery along current production lines for the sweetened condensed and evaporated milk businesses, which may potentially boost capacity by about 10%. We estimate this has the potential to increase revenue by RM16m-22m and net profit RM1.5-2.0m in FY18-19F.

• Room for growth in its 40% JV - Able Dairies Mexico. In April 2017, JTB proposed entry into a 40%-joint venture (JV) via Able Dairies Mexico, S.A.P.I. de C.V. for the condensed milk business. We understand that the JV will breakeven immediately after its commissioning, with the initial production taken up by existing customers from Mexico, Central America and US. With a similar annual capacity as in Malaysia, we expect to see some financial contributions to the Group from this JV in 2019 onwards. Growth prospects are exciting consider the size of the domestic market in Mexico as well as its neighboring regions which dwarves that of Malaysia.

Source: PublicInvest Research - 15 Aug 2017