We find those recent M&A activities, specifically, takeover offer for F&B Nutrition is affirmative to our Buy recommendation on Johore Tin Berhad (JTB). The acquisition valuation of 10.5x EBITDA less net debts suggests that our ascribed valuation for JTB’s F&B fair. Moreover, we also believe JTB’s intended strategy to grow through the Mexican plant remains intact despite uncertainties from US’s trade negotiations. Maintain our sum-ofpart valuation at RM1.80/share.

What Does Recent M&A Indicates?

Malaysian M&A activities picked up sharply in mid-2019, amongst other, we wish to highlight the takeover of F&B Nutrition Sdn Bhd (a wholly-owned subsidiary of Can-One Berhad) by Wholesale Dairies Pte Ltd (WDPL). F&B Nutrition is an OEM of sweetened creamer and evaporated creamer, with primary exposure to Southeast Asian and African markets. According to the announcement, the takeover consideration will be based on 10.5x F&B Nutrition’s FY19 EBITDA less FY18 net debt of RM107.4mn and net capital return of RM26.0mn, with the cap and floor price agreed at RM800mn and RM1bn, respectively.

By valuing JTB’s F&B on a similar valuation of 10.5x EBITDA less net debt would give us a fair value of RM515.0mn for JTB’s F&B unit. Comparing this against our sum-of-part valuation for JTB’s F&B (refer to Figure 2), or RM471.2mn, represents a 8.5% discount to the acquisition valuation. This is affirmative to our JTB’s F&B sum-of-part valuation with the discount attributed to control premium. While investors may deem the discount is too little for control premium, we find it fair given that JTB is i) a brand owner which has greater control over product differentiation, brandings and profit margins, and ii) undergoing rapid capacity expansion with strong growth projections. Although the net margin between JTB’s F&B and F&B Nutrition are largely neck to neck, c.4-8% (see Figure 1) within the recent three financial years, note that F&N – a premium branded dairy product manufacturer cum beverage producer operates at 9-10% net margin. Therefore, we opine that being a brand owner instead of an OEM is essential to product margin expansion in the future.

No “Flip-Flop” for Mexican Plant

“Flip Flopping” on political direction is no longer unheard of, with US-China trade war hitting headlines constantly, coupled with US trade negotiations against Europe, Japan, Canada, and Mexico coming in on the side. Such uncertainties with the US’s bilateral trade environment may have creeped some investors on JTB’s growth prospect, particularly on its Mexican set-up for expansion into the America continents. However, in our view, there is no need for concern because primary clienteles to be penetrated via the Mexican plant are located in Mexico itself, alongside Central and South American regions, which have independent trade environment from US. Moreover, JTB’s sales to US remain smallish at this juncture, as majority of exports to American continent (12% of total sales) are to Central America. Therefore, we believe JTB’s intended strategy to grow through the Mexican plant remains intact despite uncertainties from US’s trade negotiations.

Management updated that the construction of the Mexican condensed milk and evaporated milk factory has been completed with machines currently being shipped and installed. With expectations that installation and testing being performed in the next 3 months, the factory is expected to be ready for commercial production by 4QCY19.

Domestic Expansion Completed

Domestically, JTB has added three new production lines within Able Diaries Sdn Bhd’s (ADSB) condensed milk and evaporated milk factory. The expansion, which completed in 2QCY19, had increased JTB’s annual capacity by 30% to 78,000MT. Note that, the Malaysian factory’s production was halted for 2-3 weeks to facilitate the capacity expansion. Nevertheless, we are confident that management would be able to plan its production and inventory ahead to minimise disruptions to its sales delivery during 2QCY19. Overall, we are positive of the expansion as it provides additional capacity to meet customer’s demands and support JTB’s sales growth; this is because JTB’s condensed and evaporated milk factory has been operating at full capacity within the recent quarters.

Outlook

• Looking forward, we remain positive on JTB’s outlook, given that:

i) Tin Manufacturing segment’s earnings are expected to be supported by softer tinplate price that would provide margin stability in the near-term; and

ii) F&B sales are projected to be driven by domestic capacity expansion and strategic JV in Mexico. Moreover, we expect greater focus on product innovation and branding would lead to desirable ramp-up in sales orders.

Impact

No changes to our earnings forecast.

Valuation

Maintain Buy recommendation on JTB with unchanged TP of RM1.80/share based on 15x F&B EPS and 8x Tin Manufacturing EPS for CY20.

Source: TA Research - 16 Jul 2019