JOHOTIN (7167): JOHORE TIN BHD – An investment opportunity worth seizing
Unlike what its name would suggest, Johotin is more of a manufacturer of dairy products, than a manufacturer of tin products.
In this article, we discuss why we think Johotin is an investment opportunity worth seizing.
Johotin is involved in:
- The manufacturing and selling of milk and related dairy products, as well as packing and trading all types of dairy products (“F&B segment”) and
- Manufacturing of various tins, cans, other containers and printing of tinplate (“Tin Cans segment”)
For the F&B segment, Johotin exports more than 80% of its dairy products, mainly to West Africa, South-East Asia (“SEA”) and the American Continent. The dairy products comprise of sweetened condensed milk, evaporated milk, as well as milk powder packed in both bulk and consumer packs.
As at FYE2019 (as at 31 Dec), about 30% of its production is for its own brands (such as Able Farm, Tarik-Tarik and Enlac etc), with the remainder on an original equipment manufacturer (“OEM”) basis for multiple local and international brand owners. Johotin currently has a local market share of around 15%. It is currently investing to promote more of its house brand logo i.e. Able Farm to add more value to the company in the long run.
For the Tins Cans segment, around 20% of its production are for self-consumption. The remainder are mostly sold to locally based customers, consisting of various industries i.e. biscuit, paint and chemical, edible oil and food processing industries. As for tinplate printing services, most services are exported within the SEA market.
For the past few years, Johotin’s revenue and profits have been mainly driven by its F&B segment, contributing up to 80% and 70% respectively. The chart below visualizes Johotin’s revenue split by segment over the years.
STRONG AND CONSISTENT BUSINESS PERFORMANCE OVER THE YEARS. HEALTHY BALANCE SHEET WITH NET CASH OF APPROX. RM30.0M.
For the past 5 financial years, Johotin’s revenue grew consistently at a cumulative average growth rate (“CAGR”) of 8.5% p.a. Gross and net margins were held consistently within the range of 20% – 25% and 6.5% to 8.3% respectively, with exceptions to FYE2015 and FYE2017.
During FYE2015, the lower margins due to the F&B segment not achieving its economies of scale in the early years and the higher marketing expenses incurred, to promote its export sales. As for FYE2017, the dip were due to higher raw material costs and operating expenses.
Nonetheless, the business proved its resilience as the impact on margins during bad times were not significant, and performance proven to rebound in the subsequent years.
Since its listing in 2003, Johotin has never recorded loss for any financial years.
Johotin has been generating strong cash flow from operations (“CFO”), with an average CFO to Net Income of >0.8x over the past 5 years. The low free cash flow (“FCF”) to net income ratio in recent years were due to Johotin’s aggressive expansion on its production facilities (automation and capacity expansion) and venture into setting up of plant in Mexico (further explained below).
Despite the heavier capital expenditure (“CAPEX”) invested in recent years, Johotin remains able to distribute a healthy dividend of 2% – 5% yield, for the past 5 years.
Borrowings level has reduced over the years, since FYE2015 of RM110.1m to RM47.3m in FYE2019. The Company turned net-cash since FYE2017.
Liquidity position wise, it remains healthy and consistent throughout the years with its current ratio improving from 1.5x in FYE2015 to 2.7x in FYE2019. Operating cash cycle was also steady around the range of 120 days to 130 days.
JOHOTIN’S LATEST FINANCIALS PROVED ITS STRENGTH DESPITE THE PANDEMIC. MANAGEMENT ALSO MADE THEIR FIRST EVER SHARE BUYBACK, TOTALLING RM4.2M SINCE ITS IPO IN 2003.
3Q 2020 financial results remains relatively healthy, with its 9 months revenue and net profit closing at RM363.9m and RM31.3m respectively, achieving 63% and 66% of FYE2019 full year results, despite the halt with production during the MCO period. 9M FY2020 gross profit and net margins were healthy and consistent at 20.3% and 8.3% respectively.
From 20th July 2020 to 7th Oct 2020, Johotin made its first share buyback of 2.9m shares at a total amount RM 4.23m (Average price RM1.46, highest price RM 1.60). This seem to be the first time ever since they were listed on Bursa, that they had done shares buyback.
FAVORABLE GROWTH PROSPECTS FOR THE NEXT FEW YEARS AS THE MEXICO JOINT VENTURE STARTS PRODUCTION, WHILST THE MALAYSIA OPERATION CONTINUES TO EXPAND.
Mexico venture – Able Dairies Mexico and Able Packaging Mexico
In 2017, Johotin made its first foray into Mexico via a subscription of 43% interest in a joint venture (“JV”) to construct manufacturing facility for production of sweetened condensed milk, evaporated milk & other dairy products. The other partners of the JV are Johotin’s existing Latin American customers and a dairy producer in Mexico. To-date, Johotin has spent RM50m on their part.
The factory had now been completed after several delays and is currently under virtual commissioning. They target to start production in FYE2021.
According to analyst, Able Dairies Mexico (“ADM”) will have the same production capacity as in Malaysia, with estimated break-even for utilisation to be around 40%. It is currently looking at a profit margin of 8% to 10%. ADM’s target market would be Mexico and its neighboring countries, especially those that have free trade agreements with Mexico. At 70% utilisation, Johotin’s 43% stake in ADM is expected to contribute about RM10 million per year in net profit, with all else remaining constant.
Meanwhile, Able Packaging Mexico (“APM”) is currently being set up to produce cans for ADM. Once this factory is up, it is expected to free up 10% capacity in Malaysia factory as the current production allocation for Latin America market will be shifted to Mexico. The Mexican factory has 80,000 tonnes of monthly production capacity (55% of current Malaysian factory) and it was estimated to breakeven at 40% utilisation.
On a conservation assumption, we estimate ADM & APM to breakeven by the end of FYE2021, and only starts contributing to the bottom line in FYE2022.
Malaysia operation
Johotin’s last upgrade and expansion of its sweetened condensed milk production line was back in FYE2019. Their only recent announcement on future expansion plan was on 15 September 2020, when they acquired a 11.74 hectares land in Klang for RM44.3m. For your reference, a land size of 11.74 hectares / 29.0 acres is equivalent to about 15 soccer fields combined.
It said the acquisition is part of the company’s development plan to expand and consolidate production lines, factories, warehouse and facilities for operational efficiency and efficacy.
Johotin had also in recent years been investing in rebranding and marketing its “ABLE FARM” brand, to target the mass affluent segment. The approach was strategic to fetch better margin while avoiding direct competition with the established brands such as Dutch Lady, F&N and Nestle.
In the long run, we expect their strategy of focusing growth on its OBM sales to contribute in terms of improved profitability, at the same time, cementing its position as the leader in the mass affluent segment.
KEY RISKS ASSOCIATED WITH JOHOTIN FOR CONSIDERATION.
- Further delays with commissioning of the ADM plant in Mexico. The plant was initially set to start production by 3Q FYE2020.
- Unforeseen circumstances leading to higher than expected production cost and / or lower than expected selling price may impact ADM’s profitability.
- Shortage of labour supply i.e. local and foreign workers was always Johotin’s concern in recent years. In order to meet customer’s order as per schedule, more overtime is needed to complete orders on time, leading to an overall increase in production costs.
- Being an 80% exporter, adverse foreign currency movements poses a risk to the Company i.e. strengthening of Ringgit. Nevertheless, this is partly mitigated by natural hedging. Johotin’s purchases its raw materials in foreign currency.
- Price fluctuations of raw materials such as sugar, dairies and tins. To remain competitive, Johotin always maintain its prices to customers.
SHAREHOLDER INFORMATION AS AT 29 MAY 2020.
Management takes up close to 40% of the total float. Institutional holding of JOHOTIN is still relatively small, with only PHEIM, Hong Leong and PMB as the local funds holding less than 5%. A Nordic Boutique Fund owns 1.6% and prominent Malaysian investor Foong Si Ling owns 1%.
AT A CLOSING PRICE OF RM1.9, IS JOHOTIN STILL WORTH THE BET?
Over the past 5 years, Johotin has been trading within a PE range of 8x – 15x.
Benchmarking Johotin to its peers listed locally on Bursa, we have the likes of Dutch Lady (trading at ~25x PE), F&N (trading at ~30x PE) and Nestle (trading at ~55x PE).
General classification of the F&B segment in Malaysia, including manufacturers of non-dairy products, we observed that the market is pricing them at around 20x PE.
Earlier this year, Can-One Berhad completed the sale of its sweetened creamer and evaporated creamer manufacturing business to a private equity company from Singapore at maximum price of RM1b. That was done at a valuation of 15x PE of the division’s 2018 profit figure of RM 65m, despite Can-One Berhad being in a difficult debt situation after acquiring Kian Joo Can Factory Berhad.
Taking the above into consideration, I would value Johotin’s fair value to be priced within the range of 12x – 18x PE, as illustrated below.
AN INVESTMENT OPPORTUNITY YOU WANT TO SEIZE!
For Johotin’s resilient business model (healthy market share within its target segment), healthy and consistent profitability and strong balance sheet position, we would conclude the Company as one with strong and resilient fundamentals.
In terms of opportunities for growth, we can expect Johotin to achieve a consistent annual growth rate of about 5% p.a. (based on historical 5y CAGR of 8.5%) moving forward, with further upsides to expect when its JV in Mexico starts production, further expansion of the Malaysia’s production line (on the newly acquired land) and improvement with profitability margins (achieved from automation of production line and higher sales of its own brands products).
Based on the closing price of RM1.9, we are looking at a further upside of about 40% (Base case at 18x PE), with minimal downside of about 5% (Base case at 12x PE). On top of that, we can expect to enjoy a dividend yield of 1.5% – 3.0% per annum. For your information, the market 12 months fixed deposit (“FD”) rate currently ranges from 1.7% – 2.2% only.
With the above, we find it hard to justify placing for FD over investing into Johotin, for the latter gives me the opportunity to enjoy a capital appreciation of about 40%, in addition to dividends entitlement equivalent or more than the current FD interest rate.
Disclaimer
We are long JOHOTIN. This article is written ourselves, and it expresses our own opinions. We have no business relationship with any company whose stock is mentioned in this article, and do not receive any compensation.
Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ Bursa filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.
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