We view JTB as a cheaper alternative to the consumer sector, as it is trading at a discount to the P/E valuations of other small-to-mid cap consumer players listed on Bursa. We project JTB’s core net profit to expand by 3-year CAGR of 16.8% in FY17-20, underpinned by (i) higher sales in higher margin products at the F&B segment, (ii) higher production capacity at the F&B segment, and (iii) commencement of new production plant in Mexico. Core net profit growth aside, JTB has net cash of RM56.5m (18.2 sen per share) as at 30 Sep 2018, and this allows for continued decent dividends. We derive a fair value of RM1.88 on JTB based on 15x FY19 core EPS of 12.5 sen, in line with the average forward P/E of small-mid-cap consumer players listed in FBM KLCI.

Background. Johore Tin Bhd (JTB) is involved in (i) the manufacture of various tins, cans and other container and printing of tin plates for customers in various industries, and (ii) production of dairy products comprising sweetened condensed milk, evaporated milk, as well as blending and repacking of milk power in both bulk and consumer packs.

Higher capacity to drive earnings. The capacity expansion at condensed milk sub segment will result in production capacity at the sub-segment increasing by 30% (expected by 3Q19), hence resulting in higher earnings from 2H19. Besides, the commencement of condensed milk processing facilities in Mexico (Able Dairies Mexico S.A.P.I de C.V., which JTB owns 40% stake) by 2Q19, will free up JTB’s existing capacity at the condensed milk sub-segment. This will allow JTB it to increase its condensed milk sales volume under its own brands (i.e. “Tarik Tarik” and “Boleh Boleh”).

JV in Mexico – potential earnings growth driver from FY20. The new condensed milk production facilities will commence production by end-2Q19. We understand from management that higher operating cost at the new production plant will be offset by the significantly lower transportation cost (as JTB is currently exporting circa 20% of its condensed milk products to Mexico, which incurs significantly higher transportation cost). In our forecasts, we are projecting this venture to start contributing to JTB from 4Q19 (albeit marginally) and pick up more significantly from FY20.

A cheaper alternative to consumer sector. JTB is a cheaper exposure to the consumer sector, as it is trading at a discount to the PE valuations of other small-to mid cap consumer players listed on Bursa. We note the PE valuation gap is unjustified given that JTB has over the years shifted its focus from a tin manufacturer to a consumer product company.

Strong balance sheet. As at 30 Sep 2018, JTB had net cash of RM56.5m (net cash per share of 18.2 sen). JTB’s net cash position will remain strong, as we believe the company will continue to register positive free cash flow arising from the absence of major capex event. Given its healthy balance sheet, dividend will likely remain decent.

Forecast. We project JTB’s core net profit to grow by 26% to RM32.8m in FY18, underpinned by higher sales in higher margin products at the F&B segment. We expect the earnings growth trajectory to sustain into FY19-20 (with a projected core net profit of RM38.9m and RM45.4m in FY19-20), underpinned by (i) higher production capacity at the F&B segment, and (ii) commencement of new production plant in Mexico.

Fair value of RM1.88. We derive a fair value of RM1.88 on JTB based on 15x FY19 core EPS of 12.5 sen, in line with the average forward P/E of small-mid-cap consumer players listed in FBM KLCI.

Source: Hong Leong Investment Bank Research - 29 Jan 2019