Investment Highlights

• We upgrade Kian Joo Can Factory (Kian Joo) from a HOLD to BUY with unchanged forecasts and fair value of RM3.25/share, as its share price has fallen below our fair value. Our fair value is pegged to an FY19F PE of 11x.

• We anticipate Kian Joo’s 1QFY18 to be weak as raw material prices increased faster than projected. However, we believe its full-year results will fall in line with expectations as raw material prices normalise in the coming quarters.

• Taking hints from Kian Joo’s customers F&N and Nestle during the period under review, we saw their revenue rising by 2.2% YoY to RM 547mil and 4.2% YoY to RM1,430mil respectively. Thus far, these increases are consistent with our volume growth assumption of 2-8% across all segments (averaging 5%).

• On the currency front, according to Bloomberg, the USD depreciated against the MYR by 12% YoY from an average of US$1.00:RM4.4463 in 1QFY17 to US$1.00:RM3.9248 in 1QFY18. This is in line with our forecast of US$1.00: RM3.9500 for the full-year average. Recall that Kian Joo is a net beneficiary of the strengthening MYR – approximately 20% of Kian Joo's revenue and 35% of its total costs are denominated in USD.

• Nevertheless, the MYR boost is likely offset by increases in raw material prices (see Exhibit 1-3). Using China’s 0.22mm tin plated coil prices as a gauge, the average price of tin plates rose 6% from CNY7,263/tonne in 1QFY17 to CNY7,689/tonne in 1QFY18 (vs. 5% estimated increase for the full year). Meanwhile, the average price of LME aluminium 3-month forward climbed 16% from US$1,856/tonne in 1QFY17 to US$2,159/tonne in 1QFY18 (vs. 8% estimated increase for the full year). We are maintaining our assumptions as we expect the aluminium price to normalise in the coming quarters.

• Our BUY recommendation is premised on: 1) the defensiveness of its top-line growth underpinned by ongoing promotional efforts in the FMCG industry, to be further boosted by the abolition of GST; 2) its leading position in both two-piece and three-piece can industries, with local market shares of 60-70% and 30% respectively; and 3) Myanmar ventures coming to fruition from FY20F onwards, allowing the group to capture its young demographic profile and manufacturing cost advantage. Key risks include a longer than-expected gestation period for Myanmar ventures, a sharp increase in raw material prices and margin erosion from stiff competition.

Source: AmInvest Research - 16 May 2018