Our recent meeting with Johore Tin Berhad (JTB) reaffirmed our positive view on the group’s FY18 – FY19 earnings prospect. This is on the back of i) persistent downtrend in the milk-based commodity price that will enhance Food and Beverages (F&B) profit margins, ii) growing demand for vegetable oil packaging products that will support top-line growth for the tin manufacturing segment, and iii) maiden contribution from joint venture in Mexico in FY19. We increase our FY17-19 earnings forecast by 2.6% - 8.0%. Target price is adjusted higher to RM1.75/share. Maintain BUY.

Skimmed Milk Powder Price on a Downward trend

The F&B division, which accounts for 70% of JTB’s earnings, is highly dependent on the movement of skimmed milk powder price, the main raw material to evaporated milk, condensed milk and re-packaged milk powder. According to Global Dairy Trade, skimmed milk powder price has declined by 35.0% YoY to US$1,699/tonne as of Jan-2018. Management guided that the downward trend in the milk powder price (see Figure 1) is due to high level of stock in the European Union (EU) of 300,000 tonnes while the global demand has been stagnant. Given that the stock is perishable, there will be pressure to sell off the milk-powder in the market to avoid wastages hence contributing to further decline in global milk powder price.

Progress of Mexico JV

Management guided that the progress on the construction of an 80,000-tonnes capacity evaporated milk and condensed milk factory by its 40%-owned joint venture, i.e. Able Dairies Mexico, is expected to complete by 4Q18. JTB sees this venture as an opportunity to gain market share from its sole competitor, i.e. Nestle Mexico, and to expand its F&B earnings further. Also, as Mexico is part of the Latin American Free Trade Association, the new plant/capacity will allow the company to penetrate new markets in the South America region. Note that upon commissioning in end-FY18, the new factory is expected to immediately ramp up its production to 30% to cater for JTB’s existing customers and new customers. As such, it would not see lower earnings as a result of lower share of profit (i.e. 40%) in the JV company. In the long term, the new plant would achieve economies of scale from higher sales to new markets in the Central and South American regions.

Tinplate Price in Uptrend

The main raw material to JTB’s tin manufacturing is tinplates, which are bought locally from Perusahaan Sadur Timah Malaysia (PERSTIMA) as well as imported from China and India. The price of exported tinplate in China has been on an

uptrend since 1Q16 from USD628/tonne level to USD814/tonne in Oct-17 (see Figure 2). As of Oct-17, the tinplate price had increased as much as 13.8% YoY, underpinned by closing down of small iron ore mills with outdated induction furnaces in China. Management believes that the price would continue escalating in 2018. However, we believe that the price will not exceed the 2013’s average price of US$977/tonne. Note that JTB adopts the cost-plus approach in pricing the finished tin products. As such, the rise in tinplate cost can be fully passed on to the customers, providing a gradual price movement during the 3-6 months lag time. Overall, we believe that the profit margin for tin manufacturing segment will normalize to double digit level for FY18 from 9.5% in 9M17. As far as sales are concerned, management guided that increasing demand for vegetable oil tin packaging is expected to increase, contributing to tin manufacturing top line growth. We project a growth of 5.2% YoY in revenue within the tin manufacturing segment for FY18 and FY19.

Ringgit Strengthening to Benefit JTB

We believe approximately 70% of JTB’s revenues are generated through export sales of tin manufacturing and F&B products while approximately 80% of JTB’s costs of goods sold are imported raw materials (i.e. tinplates and milk powder). Hence, JTB being a net importer will benefit from strengthening of Ringgit. Our sensitivity analysis finds that for every 5 sen appreciation in Ringgit against the dollar, JTB’s net core earnings increases by 3.0% YoY, ceteris paribus.

Impact on 4QFY17 Results

We raise our FY17 earnings projections by 8.0% to account for lower-thanexpected skimmed milk price and normalising tin manufacturing profit margin. We have also increased our earnings forecasts by 2.6% and 6.9% for FY18 and FY19 respectively premised on assumptions that: 1) ringgit will average to USDMYR4.10 in 2018 and 2019, as well as 2) commissioning of new plant in Mexico in 4Q18 with utilisation of 30% and 40% for FY18 and FY19 respectively.

Recommendation

Maintain BUY on JTB with higher SOP valuation of RM1.75sen/share (previously RM1.70/share) based on 16x F&B earnings and 8x tin manufacturing earnings for CY18. Downside risks to our call are i) slower-than-expected contributions from re-packaging of milk powder business, ii) lower-than-expected export sales and iii) unexpected allowance for doubtful debts.

Source: TA Research - 15 Jan 2018