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(Icon) Johore Tin (2) - Benefiting From Lower Raw Material Cost ?

Publish date: Mon, 02 Feb 2015, 05:05 PM
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I follow the smell of money.



According to the article below posted on The Star today, milk products manufacturers will benefit from lower raw material price following decline of milk prices internationally.  


Milk powder is major raw material for Johore Tin's dairy division, the bulk of which are exported. Can we expect a strong set of result in coming quarters due to a combination of low raw material cost as well as strong US dollars ?


My article is written based on publicly available information. Please don't blame me if Johore Tin's coming quarter results does not meet your expectaion.


(Dutch Lady share price)



(F&N share price)


(Johore Tin share price)








Business News


Dairy shares on the rise

Monday, 2 February 2015


Dutch Lady, F&N post strong gains on falling raw material costs

PETALING JAYA: Shares of dairy companies such Dutch Lady Milk Industries Bhd and Fraser & Neave Holdings Bhd (F&N) have seen strong gains in the year-to-date period, driven largely by falling raw material costs.

Usually viewed as defensive and recession proof counters, the shares of both companies were given a boost as investors expected the low raw material prices to lead to a rise in profit margins for these leading consumer companies.

Industry players said that while bigger customers had a certain leverage to bargain for lower end-prices from these consumer giants, the drop in prices was not yet apparent for consumers buying off the shelf.

The industry players added that whether the cost savings from lower material costs would be passed on to the end consumer would also depend on factors such as competitive pressures.

“Pricing (by players like Dutch Lady and F&N) may also depend on the exchange rate. But generally the lower material costs are a net positive to their bottomlines as they could already afford to lower their prices for bulk buyers,” an industry source said.

Class III milk futures traded on the Chicago Mercantile Exchange for February 2014 delivery had seen a steep fall of about 25% since the middle of last year to a low of US$16.11 per 2,000 hundredweights (cwt).

Their prices had recovered slightly at press time to US$18.90 per cwt but analysts say that falls could resume should the overall commodity complex see further declines.

Shares of Dutch Lady and F&N had racked up commendable gains of 11.13% and 6.2% respectively in the year-to-date period to RM47.12 and RM18.52 on Friday’s close.

Both counters have outperformed the broader FTSE Bursa Malaysia KL Composite Index that rose 1.47% in the same period.

CIMB Research analyst Eing Kar Mei said in her recent report that despite the challenging operating environment on the impending goods and services tax (GST), F&N could still deliver on a bottomline basis on the launch of new products and lower raw material costs.

She rated the stock an “add” with a target price of RM24.52 noting that there could be upside potential to earnings forecast if raw material prices decline further.

“From my understanding, the steep drop in milk prices and more than able to offset the drop in the value of the ringgit for the company,” Eing said.

While Kenanga Research’s Soong Wei Siang had a “market weight” rating on Dutch Lady with a target price of RM44.22.

Other analysts also said that other than raw material costs, interest in these shares could also have been boosted by their dividend growth prospects.

Dutch Lady had seen strong growth in its dividends of 20.6% annualised in the five years prior while F&N saw a more modest dividend growth of 3.19%, according to data on Bloomberg data.

At present prices, F&N had an indicative gross yield of 2.97% while Dutch Lady at 2.33%.

However fund managers were cautious on both Dutch Lady and F&N, considering that both companies were trading at historic highs and were tagged with high valuations.

Dutch Lady with a market capitalisation of RM3.02bil is trading at a trailing price to earnings ratio (PER) of 27.86 times and an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) of 18.19 times.

While F&N that had a market capitalisation of RM6.78bil last traded at a trailing PER of 26.08 times and an EV/EBITDA of 16.79 times.



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