Period     1Q13

Actual vs.  Expectations     The 1Q13 net profit (NP) of RM30.4m was in line with expectations, making up 25.5% of the consensus estimate of RM119m and 27.9% of our forecast of RM109m. 

Dividends    No dividend was declared for the quarter.

Key Result Highlights     QoQ, the 1Q13 revenue and PBT declined by 3.4% and 15.0% respectively. The weaker results were due mainly to the lower seasonal sales from all the divisions - cans (-4.3% QoQ), cartons (-9.1% QoQ) and contract packaging (-12.7% QoQ). The PBT margin was squeezed by 1.8 ppt mainly due to losses on derivatives of RM1.8m (as opposed to gains of RM4.2m in 4Q12) from the cans division and higher operating overhead costs in the cartons division due mainly to the implementation of minimum wages in Malaysia and revision in the minimum wages in Vietnam.   

YoY, the 1Q13 revenue increased 12.7% on the back of higher sales registered by the cans (+15.4% YoY) and cartons (+12.8% YoY) divisions. Both the 1Q13 PBT and NP also improved by 14.7% and 12.0% YoY buoyed by the increased sales and better results from the cans division, which cushioned the decline in the other segments.

Better cans division. The better sales registered by the cans division were attributable to increases in both its domestic and export sales to F&B customers as well  as the expansion of capacity from its new aluminium can line, which was commissioned in 4Q12. The PBT of the cans division improved by 16.4% YoY as the group managed to maintain the margin by improving its operating efficiency with higher orders from its customers. This also managed to negate the negative cost impact of it having to implement the minimum wage policy.

Outlook    The company has the ability to further improve its production operational efficiency to continue delivering potential growth. Its prospect should also be boosted by the recent expansion of its cartons operations in northern Vietnam and in the aluminium can segment.

Change to Forecasts      No changes to our forecasts.

Rating  Downgraded to MARKET PERFORM

Valuation     We are maintaining our TP of RM2.79 even though we have rolled over our valuation to FY14. This is because we have assigned a lower Forward Target PER of 10x (vs. 11.4x previously) over FY14 EPS of 27.9 sen. The lower PER is derived from a +1 SD level to the 3-year average PER. For now, we believe the company is fairly valued until there are further catalysts to boost the share price. Given the smaller total return potential of 9.5% to our TP, we are downgrading our OUTPERFORM call to a MARKET PERFORM on Kian Joo.

Risks    Volatile commodity prices.

Source: Kenanga