Investment Highlights

• We maintain HOLD on Kian Joo Can Factory (Kian Joo) with unchanged forecasts and fair value of RM3.00/share. Our fair value is pegged to an FY19F PE of 13x, in line with the average of the manufacturing sector in Malaysia.

• Kian Joo's 3QFY17 core net profit came within expectations at RM10mil, representing declines of 36% QoQ and 81% YoY. This brings 9MFY17 net profit to RM43mil (-58% YoY), accounting for 71% of our full-year estimate.

• The sharp decline in 9MFY17 net profit was mainly attributed to higher raw material costs. Against the previous 9M, tin plate and aluminium costs increased by more than 15%, while paper cost rose more than 20%. In addition, marketing and other pre-operating expenses incurred for the group's Myanmar venture also resulted in lower profit.

• We note that there was a RM13mil inventory impairment in 9MFY17 from the tin can division. Excluding the impairment, the 9MFY17 net profit would have been higher at RM56mil, close to achieving our full-year forecast.

• Positively, management has indicated that its carton division remains on track to break even by 4QFY17. This would eliminate losses of RM13mil recorded in 9MFY17 and alleviate margin pressure facing other divisions.

• Moving forward, Kian Joo's near-term prospects are unexciting due to:

1) A long gestation period (3-5 years) expected 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 continue to eat into Kian Joo's profit margins, especially in the aluminium and cartons divisions.

• Nevertheless, we believe the group's Myanmar ventures will come to fruition from FY20F onwards, given the country'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.

Source: AmInvest Research - 24 Nov 2017