Listed in 2003, Johore Tin started as a tin can manufacturing company.

However, cognizant of the limited grow potential and mounting competitive pressures in the tin manufacturing industry, the company ventured down-stream into the manufacturing of milk and dairy products in 2011, through the acquisition of Able Dairies Sdn Bhd.
Five years later, the diversification has proved to be the right move.
Despite some initial hiccups, Johore Tin’s market cap has since jumped 8.2 times from RM45.2 million in 2010 to RM368.7 million, yielding shareholders a staggering 517% return.
The F&B segment has grown to account for 78% of revenue and 68% of profits in 2016.
We like Johore Tin for its to understand business, favourable industry outlook, improving margins, strong cash generation and solid balance sheet.
More importantly, we believe the company still has much room to grow and this growth potential is not yet fully reflected in current valuations.

Improved synergies and margins
Johore Tin’s tin cans are used to package biscuit, edible oil, paints and chemicals, pineapple and other processed food.
Its F&B products include sweetened condensed milk, evaporate milk and milk powder.
Whilst the tin can manufacturing caters, primarily, to the local market, the bulk of its dairy products are exported – to Asia (42%), Africa (11%) and Central America (6%).
In 2016, contributions from the F&B arm more than doubled, underpinning Johore Tin’s 109% surge in net profit to a record RM36.1 million.
Notably, earnings have recovered from some teething problems (product quality issue in 2014) and synergies between the two businesses increased, leading to an improvement in pre-tax margin from 6% in 2014 to 11% in 2016.
Revenue from F&B expanded at an impressive CAGR of 20%, since the first full-year contribution in 2012, reaching a record high of RM343.4 million last year.
This is largely attributable to its aggressive, albeit somewhat staggered, ramp-up in production capacity.
The company has invested RM76 million since 2011 to double its property plant and equipment to RM103 million.

Strong cash flow generation
Johore Tin’s expansion was initially funded with equity via a RM30 million rights issues with free warrants in 2012, that expanded its share base by about 22%.
In the ensuing years, management turned to bank borrowings to finance further expansion, resulting in an increase in net gearing to 38% in 2015.
Nonetheless, the company quickly pared down its borrowings with gearing falling back to a mere 3% as at end-2016, thanks to its strong cash flow generation.
In 2016, Johore Tin generate free cash flow yield 19%.
Barring any large-scale investments, we expect the company to turn net cash this year.
Strong operating cash flow aside, Johore Tin should have receive up to RM52.7 million from the conversion of warrants (currently-in-the-money) that are due to expire in 4Q17.
Johore Tin has paid dividends every year between 2011 and 2015 with dividend payout ratio averaging 22%.
Management has proposed a first and final dividend of 1.5 sen per share for 2016.
Adjusting for share split and bonus issue in Sept 2016, total dividends to be paid is the same as that for 2015.
But given that earnings doubled, this translates into a lower payout ratio of only 10%.
We suspect management decided to retain cash to fund working capital for more aggressive sales and marketing expansion in developing countries, supported by its newly completed factory.

Positive prospects in the mid-term
Johore Tin’s new factory and warehouse, which are expected to commence operations in 2017, will increase its manufacturing capacity, production efficiency and pricing competitiveness significantly.
In addition, the company is exploring the option to invest US$2 million or RM8.9 million for a 40% stake in an F&B joint venture in Mexico.Export accounted for roughly two-thirds of sales in 2015.
The weaker ringgit will enhance its export competitiveness.
Moreover, global demand for dairy products remains strong, driven by population growth in emerging countries.
Except for alcoholic beverages and pet food, metal packaging has been in gradual decline in the past decade, no thanks to stiff competition from substitute products such as plastic packaging.
However, we take comfort with its tin can products to mitigate this shift in consumer preference.
As steel constitutes 54-74% of tin can’s production costs, margins for tin can manufacturing may come under pressure in the near term due to rapidly rising steel prices.
Milk powder prices, on the other hand, have fallen 14% year-to-date as global oversupply continues to weigh on process, benefiting dairy product producers like Johore Tin.

Undervalued against growth and peers
Over the past five years, the market has re-rated Johore Tin’s shares upward from a trailing P/E of 4.5 times in 2011 to 10.2 times.
Nevertheless, we believe valuations are still attractive for the budding consumer company.
Accounting for 62.1 million outstanding warrants that will expire on Nov 21,2017, the stocks in now trading at a fully diluted trailing P/E of only 12.8 times versus the F&B sector’s P/E of 26.8 times.