Thursday 8 March 2012

JOHOTIN (FV RM1.51 - BUY) Company Update: More Room For Upside


 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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