Investment Highlights

• We initiate coverage on Kian Joo Can Factory (Kian Joo) with a HOLD recommendation and a fair value of RM3.00/share. Our fair value is pegged to an FY19F priceto-earnings (P/E) of 13x, in line with the average of the manufacturing sector in Malaysia.

• Kian Joo is primarily involved in the manufacture and distribution of tin cans, aluminium cans and corrugated fibreboard cartons. The company also provides contract packing services for carbonated beverages and milk powder on an original equipment manufacturer (OEM) basis.

• From FY16 to FY19F, we project that Kian Joo’s revenue would expand from RM1.72bil to RM2.12bil (3-year CAGR of 7%) on the back of capacity expansions in Myanmar and aggressive sales efforts from its newly established trading office in Singapore.

• On the flipside, we are forecasting a languid growth trajectory for the group's net profit for the same 3-year period (1% CAGR). This is mainly due to potential margin compression from intensifying competition and initial operating inefficiencies at Myanmar facilities.

• Kian Joo's balance sheet is healthy. As of 30 June 2017, the group had cash reserves (including short-term funds) of RM252mil and borrowings of RM557mil, which translated into a healthy net gearing ratio of circa 20%. This allows the company to pursue their current ventures comfortably (i.e. capacity expansions in Myanmar).

• Our HOLD recommendation is premised on the following considerations: 1) We are expecting a long gestation period (3-5 years) for the group's recent ventures into Myanmar. A slow capacity fill-up and high consulting fees could pose a drag on the group's profitability for the next few years. 2) Escalating raw material prices and intensifying competition have dented Kian Joo's profit margins, especially in the aluminium and cartons divisions. 3) However, we believe the company's long-term prospects remain bright as the ventures are set to bear fruit from FY20F onwards, given Myanmar's young demographic profile and manufacturing cost advantage.

• At the current price, we believe the company is fairly valued with the near-term challenges factored in.

FORECASTS AND VALUATION

We value Kian Joo at RM3.00/share, premised on an FY19F price-to-earnings (P/E) of 13x, in line with the average of the manufacturing sector in Malaysia. From FY16 to FY19F, we project that Kian Joo’s revenue would expand from RM1.72bil to RM2.12bil (3-year CAGR of 7%) on the back of capacity expansions in Myanmar and aggressive sales efforts from its newly established trading office in Singapore. On the flipside, we are forecasting a languid growth trajectory for the group's net profit for the same 3-year period (1% CAGR). This is mainly due to potential margin compression from intensifying competition and initial operating inefficiencies at Myanmar facilities.

Source: AmInvest Research - 30 Oct 2017