Investment Highlights

• We are raising Kian Joo Can Factory's (Kian Joo) fair value to RM3.25/share from RM3.00/share previously, but maintain our HOLD recommendation. Our fair value is pegged to an FY19F PE of 11x, representing a discount to its larger peers which are trading at 14x (see Exhibit 6). The discount is warranted by the group's smaller market capitalisation.

• We have raised our FY18F/FY19F earnings forecasts by 7%/16% after revising our USD/MYR assumption to 3.95 from 4.15 for both years. In our assumption, we have lowered ASP marginally to account for Kian Joo's bid to maintain competitiveness by offering discounts to customers.

• Based on our estimates, approximately 20% of Kian Joo's revenue and 35% of total costs are denominated in USD. In other words, Kian Joo is a net beneficiary of the strengthening MYR as its raw materials are partially imported. Our sensitivity analysis shows that for every 1% appreciation in the MYR against the USD, Kian Joo's earnings would be amplified by 3% (see Exhibit 1).

• Recall that Kian Joo was adversely affected by rising raw material prices as well as the strong USD in 2017. For 2018, while material prices remain high (see Exhibit 3-5), we believe the tide is turning for Kian Joo as the stronger MYR alleviates margin erosions suffered in 2017.

• 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.

Source: AmInvest Research - 25 Jan 2018