I am not an expert but here is my 2 sens of opinion on the USD loan issue brought up by Gore Abraham and sapurakencana.

Whether or not the USD loan is heavy or not depends very much on the business model they are operating in. If the Company can only generate 100 million sale in USD, taking a USD loan in excess of that will be akin to committing suicide in the current economic climate.

Unfortunately, the financial statements of both companies provide little clue as to the amount of USD sales they generate. We can only study the receivables and payables and compare it against the amount of USD loan in the book to see whether the risk is high. You can analyse and make your own conclusions whether the exposure is high for Can-One and Johotin.

We will see the Q2 results very soon, hopefully in a week's time. But the current situation seems challenging for Johotin, eventhough they have seemingly stocked up milk powder (at low price?) at the end of 2014. It is because they have not paid for the inventory in full yet at end of 2014 and were paying it through USD trade loans. From my limited knowledge, trade loans usually have a tenure of between 1 month to 6 months which mean they have to repay all by now. The weakening of Ringgit against USD in the first half of 2015 will obviously have an impact.

Also the milk powder price did not increase subsequent to 2014. It has in fact dropped to a 5 years low recently. So the question of whether it will be more profitable or not depends very much on whether they managed to sell/convert those milk powder at hand, bearing in mind that milk powder is a perishable item.

Icon, I brought up the forex a few times in your blog. My apology as I feel the need to comment again.

Having USD liability itself is not a great risk but inability to manage it will be disastrous. I am critical of Johotin's approach towards managing USD liability.

Also you have not address the high inventory level carried from Q1 this year. It seems that it may be bought at a high price compared to current milk powder price.

If they managed to convert those into sales, you will see a bumper profit. If not, it will be interesting.

Latest - milk powder price dropped to the lowest point in >5 years on 15 July. USD has also gone up to 3.8 level. Is the inventory and forex risk too much?

The latest announcement on new USD3 million foreign currency revolving credit make better sense to partially address the USD exposure situation. Revolving credit is a much better tool than trust receipt as it can be rolled forward.

But i have to say that the type of borrowings - a USD revolving credit makes a better sense then USD trust receipt used previously, judging from the nature of its trade. Only the amount may be too small.

From latest announcement, looks like more borrowings for Johotin dairy business, in USD.

Totally agree with Icon8888 on CanOne. The greatest risk in investing in CanOne is that they never play according to general norm. Else they wouldnt land themselves with Kian Joo in the first place.

Also on the EPF deal, i dont think it will happen simply because it needs 75% shareholders, present and voting at the EGM to approve. See family has enough shares to neutralise CanOne's 32.9%. The deal will then be decided by the other shareholders where EPF cannot vote.

For every 3 voting for the deal, we only need 1 share to vote against.

I would be surprised if CanOne can garner enough shareholders to pass the deal.

However, in respect of my comments here, i am interested only in the operational ratios when comparing it against Johotin.

Good business, good assets, good results, bad market price.

This is really a strange counter, i have to say.

Also some more statistics which you may be interested in:

If you want to believe that Dutch Lady actually have its head office holding the inventory for them, look at their annual report. Their purchases from related company is around RM270 million for a company with RM1 billion turnover.

Also 36% of FNB revenue is exported directly to Middle East, Africa and other Asian country, according to CanOne's circular.

This counter has been non-stop providing the legal drama worthy of academy award soap opera and does not seems to end yet. But I thought after 2 years of delay, it warrant a revisit of offer price. It has grown so much now.

Otherwise, i think the deal is dead with Can-One holding only 32.9% and See family has more than enough to neutralise Can-One shares as the deal which need 75% vote to be approved.

For each vote that is against the deal, Can-One need 3 to carry it through and i see this as a tough one.

LOL....dont let my seemingly harmless presentation of facts dampen your appetite on Johotin. My apology if my kiasu analysis upset anyone here. This is not my intention.

Here, i just wish to present a few basic facts, you make your own judgement:

1. Please go to the supermarket and see whether you can find any condensed milk, evaporated milk or milk powder with a shelf life of 2 years or more. May be not my part of the world.

2. From the website of Fonterra, the world largest dairy provider, this is what you can see under nzmp ingredient - skim milk powder section.

"Our manufacturing processes maximise the shelf-life stability of SMP and if stored under the recommended conditions it will be suitable as a dairy ingredient for 24 months".

TO suggest that Johotin who has just recovered from huge loss for quality issue (for reasons not known to us) can actually hold inventory for a longer period ........You make your own judgement.

3. Information on Can-One's dairy business are presented in full in its recent circular. Its inventory level for milk segment is only RM41 million with net receivable in USD worth RM11 million.

At 31 Dec 2014, Johotin net payable in USD of RM41 million and inventory level of RM130 million (tripled that of 2013) and still growing by RM20 million in Q1, 2015.

You make your own judgement.

4. The difference between the dairy segment between Can-One Group and Johotin is that Can-One is purely OEM manufacturer (i.e. does not have house brand) but Johotin has its own house brand.

Naturally Johotin ought to have higher margin as it is earning the traders' margin as well since it is selling its own brand. But is this actually apparent? You make your own judgement.

5. Whether not hedging USD risk and taking long position on milk powder is speculation or a stroke of genius - by the time we hit August, we will know. USD rate is 3.76 at this moment Vs 3.71 by end of Q1, 2015.

Last but not least, I kiasu, don't let me dampen your optimism on Johotin.

Observations:

1. Kian Joo, Can-One and Johotin all invest in downstream industry with different strategy with the same objective. Kian Joo has contract packing services in milk powder and beverage. Can-One has long invested in dairy business before Johotin follow suit. These downstream activities all have one similar impact to the three companies - helping them to sell more cans.

2. Lets compare the ratios of Johotin dairy segment and those of CanOne, the contract packing division in Kian Joo and Dutch Lady - which is wholly in dairy business.

Dutch Lady - Revenue - RM1,000 million, Operating profit - RM148 million (14.8%), Segment assets - RM345.5 million (Return on assets 42.8%), Total inventory - RM92.5 million

Kian Joo - Revenue - RM51 million, Operating profit - RM3.4 million (6.7%), Segment assets - RM43.5 million (Return on assets - 7.8%), Total group inventory - RM307 million

CanOne - Revenue - RM585.2 million, Operating profit - RM49.4 million (8.4%), Segment assets - RM420.8 million (Return on assets 11.7%), Total group inventory - RM125.3 million

Johotin - Revenue - RM236.7 million, Operating profit (exclude compensation) - RM13.5 million (5.7%), Segment assets - RM206.5 million (Return on assets 6.5%), Total group inventory - RM130.7 million

If exclude Able Food data, the info will be as follows:
Revenue - RM178.5 million, Operating profit (exclude compensation) - RM18.3 million (10.2%), Segment assets - RM122.2 million (Return on assets 15.0%)

Something i cannot understand is why its inventory is so high in comparison to CanOne and Dutch Lady which is double and 4 times Johotin segment revenue in dairy division. Though we can tell how much the inventory is for dairy product or tin can business.

If it is for dairy product, the risks are as follows:
A. Inventory risk - milk powder are perishable, they are food product

B. Pricing risk, high inventory suggest that shareholders better hope that milk powder price will shoot up in the near future.

If milk powder price maintain, it made the cost to finance inventory holding, however low the interest rate and warehouse rental, will actually add unnecessary cost to the company.

Worst still if the milk powder price drop further. It will have tough time selling the inventory - which you must remember, are perishable.

Apart from forex risks which has been discussed in detail, to me these are the risks which is important in understanding Johotin.

Just blowing water.....

On the flip side, of course, if it happens the other way round, then you will enjoy bumper profit on this transaction as you will stand to earn RM27.20 as your profit.

But I am a prudent guy and will always support companies doing international business with proper hedging policies in place.

Just a matter of illustration.

Lets say we buy a product at USD98 and sell it at USD100, we earn USD2 and we hedge the USD2 at the transaction date say at 3.7 now, our USD2 profit is a secured profit. We will have RM7.40 absolute profit.

If we do not hedge, we are facing a possibility that when the seller pay us, the USD may fall to 3.6 yielding only RM360 from the sale. On the other hand, there may also be a possibility that when we pay supplier, the USD may rise to 3.8, hence we have to pay RM372.40. The whole transaction become a loss making one as we loss RM12.40 instead of making a profit of RM7.40. This will happen if you don't hedge or you hedge wrongly!

USD rate is just too unpredictable these days.

My 2 sens - stock piling with a plan in hand - brilliant. Stock piling without a plan - its a gamble. Stock piling financed by USD borrowings - is another risk to be considered.

Maybe the shareholders can ask the management team for a response in the upcoming AGM.

Sounds a bit like gambling to me to stock up commodity items with short shelf life unless they have future order already secured to cover it......

Quarter 1 announcement did not have adequate information on whether there is any improvement in the management of forex exposure. But note B11 on derivative financial instrument puzzles me. The figure reported is exactly the same as Note 23 of the annual report. It is highly unlikely that the figures in March 2015 be exactly the same as December 2014.

The issue is, in the annual report, it was mentioned that the derivative financial instruments have a tenure of 2-6 months - meaning some would have matured in quarter 1 and become realised. It should have been reversed to income statement.

Also, if there is no change in the figures, it points to the possibility that it did not enter into any USD hedge in Q1. But their policy statement says that they hedge forex risks.

Just wish to share my 2 Sen worth of opinion from my analysis of the recent audited accounts.

1. Revenue increase from 241 million to 316 million, up by 75 mil. Impressive.

But if you look at Note 5(c) - the new subsidiary Able Food actually contributed bulk of the growth (58 mil) and it is making a loss of 4.8 million.

Also Note 40, one major customer contributed 40.8 million of turnover. That is 13% of turnover.
Note 41.1(b), two major customers owe the company 27% of trade debtors. That is roughly 21 million.

Heavy reliance on single customer is something the company need to manage carefully.

2. Forex risk - has the company managed it properly?

No one can predict how Usd rate will move the next minute. But the risk can somewhat be managed properly to reduced forex loss.

Note 41.1(a) showed that the company has exposures in USD and SGD. For USD, combined financial assets in USD is 51 mil but the combined financial liabilities in USD is a whopping 92 million! The net exposure is 42 million.

If you analysed further, you will notice that under Note 24, the company have only covered 13.5 million of the forex risk through hedging leaving 28 million to forex risk.

If you look at the component of USD financial liability, could the management have handled it better? The answer is YES. Bulk of the USD liability is from USD Trust Receipt. My opinion is that the company should instead borrow half in UsD and half in RM, the forex risk will be eliminated!

3. PE Ratio

Johotin is no longer a tin can manufacturer.by virtue of high contribution of food and beverage operation, it's PER does not reflect that. PER of tin can manufacturer is high single digit or low teen. PER for food company is in the region of 20-30!

Let's hope the market will re-price this counter soon......

tt101 Dont get me wrong. Nobody can forecast forex rate but the forex risk can be managed. What I meant is it appear that they did not know how to manage forex risks.

If they don't know how to manage forex risk, this is going to be a long term issue if they continue to do international business!

Both Kian Joo and Can-one reported impressive Q1 results. Hopefully Johore Tin will follow suit.

LOL....canone was queried left right centre when they proposed to acquire kian joo at 1.65 when the share was traded at 1.20 level, and luckily the deal went through......but no one seems to thank them for their bold move then that help to increase the value of canone.....lol...

However, i thought the MD and COO was rather arrogant in the AGM though. Dont really like them, but if they can keep on bringing in profit,.........

Lets be objective - What is the share price of Kian Joo before the offer? Has it been trading above even RM2 about a year before the offer came in? [Not my comment but rather the CFO after the AGM the other day.]

He went on to say to me that the basic fundamental of the Company has not changed except that it is now more profitable then before. But he ask whether the Company has changed that much to have a huge jump in share price.

Valid?