INVESTMENT HIGHLIGHTS

• 1QFY18 results below expectation

• Earnings declined by 24.2% yoy due to higher raw material and operating costs

• Revise net profit by 21.6% to due to higher costs

• Maintain BUY with adjusted TP of RM2.71

1QFY18 results below expectation. Can-One Bhd’s (Can-One) first quarter net profit of RM11.4m missed our expectations, making up 14% of our full year forecast. No dividend was announced, which is within expectation.

Earnings declined by 24.2% yoy due to higher raw material and operating costs. The net profit of RM11.4m came on the back of revenue that grew 19% yoy to RM310.5m. Earnings did not rise in tandem with revenue mainly due to higher raw material costs for its tin can division. The decrease in net profit is also attributed to the lower contribution from Kian Joo Can Factory (KJCF). Contribution from KJCF for the quarter dropped due to higher raw material costs and the continued losses at its cartons division.That said, sales for the all the divisions at Can-One grew, namely: general cans (+9.9%yoy), food (+30.5%yoy) and international trading (+46.2%yoy). Qoq, earnings fell 35% due to the reasons mentioned above.

Revise net profit by 21.6% to factor in higher costs and lower contribution from KJCF. Our earnings estimates for FY18F/FY19F are cut by 21.6%/19.3% to RM65.1m/RM75.4m. We have also revised our volume assumption and raise our revenue estimates by 4.2% for FY18F and FY19F. The lower earnings despite higher sales is due to margin compression as a result of higher raw material and operating costs. We expect second half to be stronger as it takes time for CanOne to pass on some of the raw material costs to its customers.

Maintain BUY with adjusted TP of RM2.71 (previously RM3.46). Our TP of RM2.71 is based on 8x FY18F EPS of 33.9 sen. Our valuation method of 8x PER based on Can-One’s two-year average PE band is unchanged. We like Can-One for its attractive valuation, long-term prospects and earnings resilience as a proxy to the consumer staple industry.

Source: MIDF Research - 1 Jun 2018