Investment Highlights

• We maintain HOLD on Kian Joo Can Factory (Kian Joo) with an unchanged fair value of RM3.25/share, pegged to an FY19F PE of 11x. We have fine-tuned our FY18F-FY19F net profit forecasts by 0.2-1.6% for housekeeping reasons.

• Kian Joo's FY17 core net profit came above our expectation at RM90mil, representing a YoY decline of 27%. For 4QFY17, core net profit surged nearly 5x QoQ and more than 2x YoY.

• The improvements stemmed from upward adjustments of selling prices to pass on the increase in raw material prices. In addition, we note that there was positive taxation in FY17 due to the availability of tax incentives in certain subsidiaries and a lower tax rate in Vietnam.

• Recall that Kian Joo was adversely affected by rising raw material prices as well as the strong USD in 2017. Moving into 2018, we believe the tide is turning for Kian Joo due to the stronger MYR coupled with the group's ability to pass on the increase in raw material prices.

• 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 - 23 Feb 2018