An estimate-beating quarter. Johortin's 1HFY12 earnings accounted for 60.5% of our full-year estimates, with total revenue growing 12.2% sequentially due to stronger contributions from its F&B division. PBT at its tin can manufacturing division was stronger at RM2.8m versus RM1.6m in the preceding quarter while PBT in the F&B division was also stronger, at RM3.9m compared with RM2.4m in the preceding quarter. Meanwhile, 2Q12 net profit surged 47.2% q-o-q due to declining prices of raw material used in its tin can manufacturing division as well as stronger demand for sweetened condensed milk, which bolstered F&B sales. Following the stronger-than-expected quarter, we are thereby raising our FY12 earnings estimate by 6.1% as we expect sales at the F&B division to remain robust.  

Rights issue pending regulatory approval. Earlier this month, Johortin announced on Bursa Malaysia that it will undertake a rights issue of 23,326,333 new RM1.00 ordinary shares together with 23,326,333 free detachable warrants on the basis of one rights share and one warrant for every three existing RM1.00 shares in the company, held at an entitlement date to be determined later. The proposed exercise is still pending regulatory approval and management expects it to be completed in 4Q12, barring any unforeseen circumstances. In tandem with the strong results, we are advising investors to subscribe to the rights shares in view of the company's strong prospects, especially its F&B division.

Maintain BUY. We are reiterating our BUY recommendation on Johortin and value the stock at RM2.38 based on SOP valuation, premised on its FY13 earnings, with a 6.5x PER for its tin can manufacturing business and 10.0x PER for its dairy product manufacturing segment (representing a 50% discount on its larger peers such as F&N and Etika). Note that our FV remains unchanged despite the corporate exercise as we have already diluted its earnings per share based on the enlarged share base, but have excluded the full conversion of its warrants for ease of comparison.

Source: OSK