Kian Joo Can Factory - 1Q12 results in line, call upgraded

Period   1Q12

Actual vs. Expectations

1Q12 net profit (NP) of RM27.2m was broadly in line, making up 21% and 22% of the street’s estimate and our forecast of RM133m and RM122m respectively. 1Q is seasonally the weakest due to festive season.

Dividends  No dividend was declared for the quarter.

Key Result Highlights

YoY, 1Q12 revenue increased 5% on the back of higher sales registered by cans (+7% YoY) and cartons divisions (+7% YoY), which cushioned the decline in sales from contract packaging (-22% YoY).

NP YoY declined 12%, dragged down by the margin squeeze for cans division (PBT was -28% YoY). 

The PBT margin for cans eroded from 15.9% in 1Q11 to 13.4% in 1Q12 due mainly to the downward revision of selling prices despite a higher volume sales recorded, especially export sales, which accounted for 90% of the total increase in sales.    

That said, the decline in the overall NP was partially mitigated by the margin expansion from cartons (PBT +92% YoY) due to better sales from Vietnam and a higher depreciation of Dong in 1Q11. There was also better operating efficiency here where its operating expenses to sales ratio declined from 5.9% to 4.6%.

Despite the QoQ decline in revenue by 9%, the NP improved 81% for the same comparison. This was mainly attributable to gains in derivative contracts and forex as well as a lower tax rate. 

Outlook  Fundamentally, we remain positive on the company’s ability to further improve its production and operating efficiency to continue delivering organic growth ahead and also its efforts to develop its regional markets this year. 

Change to Forecasts

Maintaining our FY12-13E NP of RM122mRM138m. 

Rating  Raised to OUTPERFORM

Valuation   Despite the ongoing legal tussle, we observe that the company’s operations continue to function normally. In fact, the  top line is growing healthily. As a result, we believe the company is still undervalued, trading at a low Fwd PER of 6.9x. Thus, we are raising our rating on Kian Joo from a MARKET PERFORM to an OUTPERFORM with an unchanged TP of RM2.19 given total return upside of 21%. Our TP is based on 8x Fwd PER over FY12 EPS of 27.4 sen.

Risks  The global economic uncertainty could drive a price upswing in commodities, which will in turn hit the company’s earnings.    

Source: Kenanga