After the conclusion of our Small Cap Day 2012 which
featured Johore Tin (JTB) as one of our top 5 small cap buys, we took a look at
its growth prospects following the updates provided by management during the
event. All in all, we continue to like JTB and value the stock at a revised FV
of RM1.70 premised on its 12-month forward earnings. Although the stock has
surged by some 80% since our initiation, we continue to see strength in its
future prospects given the strong demand for products under its dairy product
manufacturing business. The stock also offers a dividend yield of close to 4%
for both FY12 and FY13. Maintain BUY.
Tin can business to
grow with its dairy product manufacturing business. Moving forward, revenue from its tin can
business is likely to grow at the rate of 2-4% above the growth rate of its
dairy product manufacturing business, as demand from its main clients such as
Kraft and Lee Pineapple is expected to grow in tandem with the country’s economic
growth. While the growth prospects in this division may not be very exciting in
the near term, we think that the relatively stable nature of this business,
backed by its strong relationship with a few top customers, is positive for the
group’s recurring income.
Growing its dairy
product manufacturing business further. To recap, JTB acquired its dairy
product manufacturing business via the acquisition of Able Dairies SB (ADSB) last
October, which came with a profit guarantee of RM7m for 2011 and RM10m for 2012.
Some 15-20% of its products are sold locally while the rest is exported mostly
to West Africa (50-60% of sales) and South East Asia. This year, revenue from
dairy product manufacturing is likely to surpass that of its tin can business,
as the former’s production capacity is expected to be maxed out over the next
4-6 months. As demand for its sweetened condensed milk remains strong,
management is looking to expand the capacity of its production lines by
building a new factory to cater to the increasing demand. We gather that the
expansion plan will cost some RM18m-RM20m and the construction is expected to
take one year to complete. We think that the expansion plan is positive in the
long run as demand for its main product – sweetened condensed milk –is expected
to remain strong over the next few years.
Maintain BUY. All
in all, we continue to like the stock given the strong prospects of the group
moving forward, which is further sweetened by its still-attractive valuation.
We believe the company will see further upside once its expansion plan is
firmed up. We are reiterating our BUY recommendation on JTB with a revised FV
of RM1.70, premised on its 12-month forward earnings – 6.5x PER for its tin can manufacturing
business and 8.0x PER for its dairy product manufacturing division.
Source: OSK188
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