Period     2Q13/1H13

Actual vs. Expectations   1H13’s net profit (NP) of RM62.6m was in line with the street and our estimates, making up 52% and 57% of full-year forecasts of RM120.3m and RM108.8m, respectively. 

Dividends    Interim and special tax exempt total NDPS of 6.25 sen was declared as expected similar to last year distribution. We expect total FY13E NDPS at 12.7 sen, translating into dividend yield of 4.4%.

Key Result Highlights   1H13 revenue increased 9.1% on the back of higher sales registered by cans (+14.1% YoY) and cartons (+8.1% YoY) divisions, which mitigated the decline in contract packaging (-33.2%).

Stellar earnings growth. YoY, 1H13 NP improved 37.3%, buoyed by better earnings from cans division, in which the PBT recorded 39.4% YoY growth, which helped to mitigate the decline in cartons division (PBT -18.7% YoY). The improvement in cans was mainly attributable to better sales resulting from the new production capacity for aluminium cans in its Nilai plant and improved demand of dry food cans. Improved margins were evident in both cans (+2.8 ppt) and contract packaging (+3.5 ppt) divisions. The former was mainly due to better operating efficiency while the latter benefited from the disposal of a loss-making operation in Vietnam last year.  

YoY,  2Q13 NP jumped by 74.5% despite a single digit revenue growth of 5.9%. Profitability was mainly boosted by the cans division for the reason as mentioned above, where the PBT improved significantly by 71.2% YoY and cushioned the lower earnings from cartons (-22.4% YoY) and contract packaging (-37.0% YoY) divisions. 

QoQ, 2Q13 NP improved by 5.7% supported by a 7.3% increase in revenue as the overall sales improved due to festive season orders. 

Outlook    The company has the resources to further improve its production operational efficiency and continue delivering growth. Moreover, we believe the easing raw material prices will also benefit its bottom-line. 

Change to Forecasts    After revising our assumptions of tin (-9.8% and -2.5%) and aluminium (-5.6% and -4.2%) prices for FY13-14 based on consensus estimates, our FY13E and FY14E NP are tweaked higher by 12.8%-12.9% from RM108.8mRM124.2 to RM122.7m-RM140.3m.

Rating  Upgraded to OUTPERFORM

Valuation     In line with the earnings forecasts upgrade, we also revised up the TP from RM2.79 to RM3.16 based on an unchanged Fwd PER of 10x on FY14E EPS. Given a potential total return of 14% to our TP, we are upgrading our MARKET PERFORM call on KIAN JOO to OUTPERFORM.

Risks    Volatile raw material and commodity prices.

Other Points    Aborts proposal for bonus and rights issue of warrant. In 2011, the company proposed a 1-for-2 bonus issue; and a 1-for-4 renounceable rights issue of warrant after bonus issue at an issue price of RM0.01 per warrant. However, due to the long overdrawn lawsuit between the liquidator (KPMG Corporate Services) and the ex-controlling shareholders led by Dato’ See Teow Chuan, CANONE, the current shareholder of KIAN JOO, filed a lawsuit against KIAN JOO from proceeding with the corporate exercises. We also understand from the current management that the proposals are not always in the best interests of the company. We view this positively as it will help to avoid any potential earnings dilution to the shareholders. Moreover, KIAN JOO has just turned into net cash position and thus we reckon there is no value-added from the potential fund-raising exercise to the company.

Source: Kenanga