Since our Non-rated report (TP RM1.88) on 29 Jan, Johotin inched up 2.4% on 15 Feb after fluctuated within RM1.17-1.32 band. We expect share prices to grind higher in anticipation of positive 4Q18 results and improving FY19-20 outlook, 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. Overall, Johotin is a cheaper proxy to consumer sector amid undemanding valuation at 10.1x (34% lower than its peers) or 8.6x ex-cash, supported by strong 18% FY18-20 EPS CAGR and 18.2sen net cash/ share (which allows continued decent dividends). A decisive breakout above RM1.32 (52W high) will lift prices higher towards RM1.40-1.49 territory.

Company profile. Johore Tin (listed in Oct 2003) has 2 business segments, namely: (i) Tin manufacturing segment, which is involved in the manufacture of various tins, cans and other container and printing of tin plates for customers in various industries mainly in biscuit, paint and chemical, edible oil and food processing industries in Malaysia, and tin plates painting mostly for export market and (ii) Food and beverage (F&B) segment, which is involved in the 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. In 9M18, F&B segment accounted for 76% and 61% of Johotin’s revenue and PBT, respectively while the tin manufacturing division accounted for the rest.

Higher capacity to drive earnings. Production volume at Johotin’s condensed milk sub-segment (part of the F&B division) has been increasing since FY16, thanks to improving demand for condensed milk in the domestic market. Johotin has invested further in its production facilities amid increasing demand for condensed milk, which will result in production capacity at the sub-segment increasing by 30% (expected by 3Q19), hence resulting in higher earnings from 2H19.

JV in Mexico may drive earnings further. Higher production capacity aside, we note that the commencement of condensed milk processing facilities in Mexico (Able Dairies Mexico S.A.P.I de C.V., which Johotin owns 40% stake in the unit) by 2Q19, will free up Johotin’s existing capacity at the condensed milk sub-segment, enabling it to increase condensed milk sales volume under its own brands (i.e. “Tarik Tarik” and “Boleh Boleh”).

A cheaper alternative to consumer sector. Johotin offers a cheaper exposure 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, and we note the P/E valuation gap is unjustified given that the group has over the years shifted its focus from a tin manufacturer to a consumer product company (evidenced by the higher margins F&B segment’s increasing share of EBITDA from 43% in FY15 to 63% in FY17).

LT bullish amid rounding bottom formation. After sliding 53% from all-time high of RM1.76 (May 2017) to a low of RM0.835 (Nov 2018), Johotin started a 51% relief rally to end at RM1.26 last Friday, forming a rounding bottom pattern. The rounding bottom is a long-term reversal pattern and represents a long consolidation period that turns from a bearish bias to a bullish bias. A bullsih momentum brekaout above 52W high at RM1.32 may lift prices higher towards RM1.40 barrier and followed by our LT objective of RM1.49. The stock may take a breather if it cannot breach above the RM1.32 threshold in the coming sessions. Supports may be found at RM1.16-1.20 levels. Cut loss at RM1.15.

Source: Hong Leong Investment Bank Research - 18 Feb 2019