Kian Joo Can Factory Estimates lowered but still strong

OUTPERFORM
Target Price: RM3.00

Period 
2Q12/1H12

Actual vs. Expectations
The 1H12 net profit (NP) of RM45.6m was slightly below estimates, making up 37.7% and 37.5% of the street’s estimate and our forecast of RM121.0m and RM121.7m respectively. However, the 1H12 revenue of RM571.4m was broadly in line with our forecast of RM1250.1m (at 45.7%) as the 1H is seasonally slower and making up 45%-47% of the full-year revenue.

Dividends 
A total interim and special tax exempt NDPS of 6.25 sen was declared, as expected, similar to the payout made last year. We expect FY12E NDPS of 10.7 sen, implying a full-year (FY12) dividend yield of 3.9%.

Key Result Highlights 

• YoY, 1H12 revenue increased 10.5% on the back of higher sales registered by the cans (+9.9% YoY), cartons (+8.5% YoY) and contract packaging (+23.0%) divisions. 
• However, 1H12 NP YoY dropped 25.6%, dragged down by the margin squeeze in the cans division (PBT -27.3% YoY) while improved margins were seen in both the cartons (+2.7 ppt) and contract packaging (+0.8 ppt) divisions were not enough to mitigate the impact of the 6.5 ppt decline in the cans’ PBT margin. The PBT margin for cans eroded from 19.2% in 1H11 to 12.7% in 1H12 due mainly to the downward revision of selling price, higher operating costs and inventory write-offs. 
• Meanwhile, the margin expansion from cartons (PBT +40.6% YoY) was attributed to better sales from both Malaysia and Vietnam and also improved operating efficiency from an increased production volume to meet the strong domestic demand in both countries. 
• QoQ, despite a 14.2%-increase in revenue, the NP dropped 32.2%. This was mainly due to a higher tax rate and lower margin from the cans division (PBT -27.6% QoQ) arising from the full impact of the reduction in selling price in 1Q12, higher operating cost and derivatives losses.

Outlook 
Although there was hiccup in the cans division (we believe its higher operating cost was mainly due to higher expenses arising from the expansion activities), we remain positive on the company’s ability to further improve its production efficiency to continue delivering organic growth ahead and also on its efforts to develop its regional markets.

Change to Forecasts 
Due to higher operating expenses incurred in 1H12, we are revising down our FY12-13E NP of RM121.7m- RM138.7m to RM95.5-RM117.9 while maintaining our top line estimates.

Rating 
Maintained OUTPERFORM

Valuation 

• Despite lower earnings estimates, we maintain our TP at RM3.00. Our TP is based on a higher Fwd PER of 11.4x (9.5x previously) over FY13 EPS of 26.5 sen, with the higher PER derived from the +1SD above the 5 year average PER. 
• The company deserves a higher valuation PER as positive synergies with Can-One are expected in the near future after the recent changes in management. Given that there is still room for a 13.8%-total return, we are thus maintaining OUTPERFORM call on Kian Joo. 

Risks 
Upswing in commodity prices will hit the company’s earnings.


Source: Kenaga