Our recent meeting with Johore Tin Berhad’s (JTB) management reaffirmed our positive view on the group. This is on the back of i) ramp up in production ii) growth catalyst through Mexican plant and iii) favourable portfolio shift. We reiterate Buy on JTB as it is trading at an undemanding implied FY20 PER of 9.5x. Target price has been raised to RM2.00/share.

Ramping Up Domestic Production

Management guided that its wholly-owned subsidiary, Able Diaries Sdn Bhd’s (ADSB), condensed milk capacity has recently been increased by 60kMT/annum to c.160kMT/annum. The renewed capacity was a result of adding multiple new production lines in the factory. Corresponding to the renewed capacity, production has also been ramped up to meet pent-up demands from customers and also progressively fulfils outstanding orders that have been built up over recent quarters, when the factory was operating at full capacity. It is expected that the group may need another 2-3 months to clear the backlog orders. Overall, we are positive on this timely expansion to support JTB’s sales growth in the future.

Progress of Mexico JV

In September 2019, JTB increased its stake in Able Dairies Mexico from 40.0% to 43.13%. Management updated that installation of machineries in its Mexican condensed milk and evaporated milk factory are still on-going but the estimated commercial production date is now postponed to 1QCY20 from 4QCY19 guided previously. We understand that the Mexican plant’s installed production capacity could be on par with the enlarged capacity of Teluk Panglima Garang’s plant (at c.160kMT capacity of evaporated milk and condensed milk) suggesting that JTB remains optimistic, if not more so about the Mexican venture (we understand it initially targeted plant’s capacity of c.80kMT).

As Mexico has formed various free trade agreement with most countries in the Western hemisphere, the new plant will provide JTB a stronger foothold into Mexico itself, alongside Central and South American region through more favourable import duty structure. Besides, Mexican JV’s ability to source dairies supplies domestically and from neighbouring countries, alongside better managed logistics arrangement is expected to result in higher profitability. We also understand that JTB and its JV partner have begun marketing, engaging sales leads and participate in exhibition shows.

Favourable Portfolio Shift

Among various factors, we observe geographical exposure of customer is also a major factor that could affects profitability of JTB. Within the recent 3 years, core net margin of JTB was inversely correlated with the proportion of JTB’s African sales. Such observation is in line with management’s explanation that African continent is very sensitive to product pricing, where quality is at times secondary to affordability.

Hence, with the group’s continued efforts in growing its Asian, Central American and Malaysian markets that are conducive for sales of better margin products, we believe favourable product portfolio would provide certain support to the group’s profitability amidst increasing raw material prices. Note that Malaysian, Central American and Asian sales grew 38.4%, 52.7%, and 12.0% YoY in FY18 substituting a huge portion of sales to African continent. Meanwhile, we believe majority of the 28.7% YoY revenue growth recorded by JTB during 1HFY19 is underpinned by the higher margin products thus supportive of the 1.6%-pts increase in core net margin.

Undemanding Valuation

As a growing consumer stock that is likely to mark its record yearly profit, we find JTB valuation to be undemanding at a trading FY20 PER of 9.5x. Besides, at current levels, we expect the stock to offer investors dividend yield of 4.1-4.7% over FY19-21. This is based on assumed dividend payout of 6.0-7.0sen/share or 40-44% of net earnings for FY19-21 (recent FY17-18 historical dividend payout were 43-48%). Moreover, we expect the group to continue generating strong operating cash flows and to have low capex requirement moving into FY20, after completion of both domestic expansion alongside Mexico facilities.

Impact

Main changes to our earnings model are as follows:

1. Adjusting production capacity to 160MT/annum (up by 60MT/annum), taking into account the domestic expansion and the delay in commencement of Mexican operations;
2. Increasing FY19 capex assumptions.
3. Raising FY19/20/21 DPS from 5.0/6.0/6.5sen to 6.0/6.5/7.0sen. Thus, our FY19-21 forecasts are adjusted higher by 9-17% respectively.

Valuation

Reiterate Buy recommendation on JTB with higher TP of RM2.00/share (previously RM1.80/share) based on 15x F&B EPS and 8x Tin Manufacturing EPS for CY20.

Source: TA Research - 8 Nov 2019