Review

• Johore Tin Berhad’s (JTB) FY17 adjusted net profit came in below ours and consensus full-year estimates at 71% and 69% respectively. This was due to higher-than-expected raw material and operating costs.

• After excluding exceptional items, adjusted net profit for FY17 declined by 28.0% YoY to RM23.1mn. This was due to decline in reportable profit across tin manufacturing segment and food & beverage (F&B) segment by 26.1% and 22.5% respectively on the back of higher operating and raw material costs (i.e. tinplates, sugar and pam oil). This was partially offset by increase in revenue by 4.3% YoY and 8.8% YoY in the tin manufacturing and F&B segment respectively for FY17 due to higher sales in products.

• QoQ, adjusted net profit declined by 86.3% to RM1.1mn as segmentally, F&B division reportable profit declined by 74.4% QoQ attributable to i) higher operating costs post commissioning of new repackaging of milk powder factory and; ii) higher raw material costs (i.e. sugar and palm oil). While the tin manufacturing returned to the black at RM3.5mn from a net loss of RM0.4mn in the previous quarter due to increase in revenue by 3.3% QoQ and cost savings achieved from supplier discount for one of the machineries.

• The group declared a single-tier fourth interim dividend of 1.0sen/share in the current quarter. Cumulatively, JTB has declared a total DPS of 5.5sen/share for FY17 (previously 4.0sen/share in FY16).

Impact

• We downgrade our earnings forecast by 13.1% and 11.2% for FY18 and FY19 respectively after lowering our revenue assumptions in line with competitive market environment and increasing our operating costs assumptions considering higher administrative expenses and distribution expenses. We are also introducing FY20 earnings forecast which is expected to provide 4.6% YoY growth.

Outlook

• We believe that FY18 revenue will be driven by: i) ramping up of capacity of milk-repackaging factory from 25% to 35% utilisation rate; ii) increase in demand for milk-based products domestically and globally and; iii) higher sales from printing services in the manufacturing segment.

• Management guided that they are wary of the uptrend in global prices of tinplates, which could drag profit margins for the manufacturing segment. However, some of the costs of tinplates may be passed on to clients, hence retaining profit margin at 10% level for FY18.

• F&B segment is expected to benefit from the downtrend in skimmed-milk powder price. However, high refined palm oil and sugar prices are expected to drag profit margin down for the F&B segment.

Valuation

• Maintain our BUY call on JTB with lower target price of RM1.48sen/share (previously RM1.75sen/share) based on SOP-valuation. Reasons for our call are: i) rise in tinplate costs are able to be passed on to clients hence maintaining net profit margin at 10% for tin manufacturing division; ii) higher contribution from the milk powder products as JTB ramp up capacity to 35% utilisation rate and; iii) healthy balance sheet allows for attractive dividends.

Source: TA Research - 28 Feb 2018