Investment Highlights

• We maintain BUY on Kian Joo Can (KJC) with unchanged forecasts and fair value of RM3.25/share, which is pegged to an FY19F PE of 11x.

• KJC’s 1QFY18 core net profit came in at only 16% of both our full-year forecast and full-year consensus estimates. However, we consider the results within expectations as 1QFY18 performance was weighed down by abnormally high input costs, hurting margins. We expect input costs to normalise over the remaining quarters.

• Using China’s 0.2mm tin-plated coil prices as a gauge, the average price of tin plates rose 6% YoY to CNY7,689/tonne in 1QFY18 (vs. our assumption of a 5% increase for the full year). Meanwhile, the average price of LME aluminum 3-month forward climbed 16% YoY to US$2,159/tonne in 1QFY18 (vs. 8% estimated increase for the full year).

• 1QFY18 turnover grew 3% YoY. Upward adjustments in selling prices (due to cost-push factors) across the board were partially offset by the lower sales volume of aluminium cans. This was attributed to the still subdued consumer sentiment.

• However, 1QFY18 EBIT contracted 22% YoY as KJC was unable to fully pass on the higher input costs to its customers. This was partially mitigated by a firmer ringgit against the USD, given some of its raw materials are denominated in USD. The MYR appreciated 12% against the USD YoY from an average of US$1.00: RM4.4463 in 1QFY17 to US$1.00: RM3.9248 in 1QFY18.

• In its carton division, KJC recorded a wider loss before interests and taxes of RM5.3mil in 1QFY18 due to its inability to fully pass on the rising paper costs. This was exacerbated by the MYR’s appreciation against the Vietnamese dong, resulting in a currency translation loss. Positively, EBIT in the trading division rose 15% YoY to RM4mil amid an increase in KJC’s trading activities.

• Our BUY recommendation is premised on: 1) the defensiveness of its top-line growth underpinned by ongoing promotional efforts in the FMCG industry, which will be further boosted by the abolition of GST; 2) its leading market position in both the two-piece and there-piece can industries, with local market shares of 60-70% and 30% respectively; 2) Myanmar ventures coming into fruition FY20F onwards, given the country's young demographic profile and manufacturing cost advantage.

Source: AmInvest Research - 25 May 2018