Since we initiated coverage
in Oct 2011, Johore Tin Bhd’s (JTB) share price has rallied by some 38.5%,
propelled by its stronger-than-expected 4Q11 earnings. Its strong earnings were
largely due to contributions from its newly acquired dairy product business
whose future prospects remain bright. Despite the strong rally, the stock is
still trading at an attractive 5.4x FY12 earnings compared to an average of
7.5x FY12 earnings for its peers. Given its attractive fundamentals and valuation,
we reckon JTB could be a potential M&A target. We reiterate our BUY call
with an unchanged FV of RM1.51 based on our SOP valuation.
Charging like a bull.
JTB’s share price has rallied by some 38.5% since we initiated coverage
on the stock in Oct last year. The rally was largely due to its
stronger-thanexpected earnings in 4Q11, buoyed by strong earnings from its
newly acquired business, a dairy product manufacturing firm called Able Dairies (ADSB). The acquisition came with a net profit
guarantee of RM7m in FY11 and RM10m in FY12, and given the strong demand for
condensed milk in third-world countries as a substitute for milk, we remain
positive on the prospects of this business going forward.
Balance sheet intact. Incorporating ADSB’s balance sheet
into the picture, JTB’s net gearing ratio stood at 0.12x as of 4QFY11, while
its debt-to-equity ratio stood at 0.42x. We think that the group is poised to
be in a net cash position in FY12, given its
robust near-term profitability and ability to pare down its debt.
Valuation still attractive. Despite the strong rally, JTB is
merely trading at 5.4x FY12 earnings compared to its peers (such as Can-One and
Kian Joo) which are trading at an average of 7.5x FY12 earnings. With our FV at
RM1.51, JTB offers a potential upside of 39.8% based on its last traded price
of RM1.08.
Maintain BUY. Given its attractive valuation and low market
cap of RM75.6m, we think that the company could likely be a potential M&A
target. Nonetheless, even if there is a lack of any corporate exercise in the
near term, the stock remains a strong BUY purely from a fundamental standpoint.
We are reiterating our BUY recommendation on JTB with a FV of RM1.51, premised
on: (i) 6.5x FY12 earnings for its tin can manufacturing business, and (ii)
8.0x FY12 earnings for its dairy product manufacturing business.
Source: OSK188
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