Friday, December 7, 2012

Johore Tin (RM1.54; TP: RM2.20-2.73): PER~5x, Div yield of 4-5% for a F&B counter? Too good to be true! (UPDATED)

I’ve mentioned Johore Tin a few times before and the company indeed never failed to deliver what I’ve expected but in fact even went beyond what I anticipated (Please click here for my previous posts). 

Johore Tin just announced its quarterly results few days back and I was pleasantly surprised by its strong performance during the quarter. I expected a profit of RM18mil earlier for the whole year of FY12 but now its 9MFY12 net profit was already at RM16.7mil. 

During 3QFY12, net profit rose 48.4% qoq to RM7.8mil. Revenue rose 5.9% to RM64.7mil. Net margin expanded substantially to 12% from 8.6% in 2QFY12. The main drivers for the good performance were lower material prices which boosted margins in tin can manufacturing coupled with stronger sales of its dairy products. 

Tin can manufacturing earnings rose substantially qoq to RM4.2mil, accounting for 44% of earnings for the quarter. Its F&B division registered a 37% qoq rise in earnings to RM5.2mil on the back of 17% qoq increase in revenue to RM46.9mil, accounting for the remaining 56% of the company’s earnings. 

Going forward, raw material prices are expected to decrease in the near term according to management. Thus, tin can manufacturing could continue to benefit from it. Having said that, margins for tin can manufacturing could normalize again as the cost savings will be passed on to customers. As for F&B, demand for dairy products will continue to remain firm which will result in higher sales and profits. 

Valuation: Assuming another RM5mil net profit for 4QFY12, total earnings for FY12 could reach RM21.7mil, thus PER for FY12 would be at PER of 6.6x. OSK currently has an earnings estimate of RM25.5mil for FY13 which I think is easily achievable. Thus, forward PER for FY13 is just at 5.6x. Where do you get PER of less than 6x for a growing consumer stock??? I can’t find any, perhaps this is the cheapest F&B stock I can get from KLSE!! Compare this with Nestle (PER 30x), Dutch Lady (PER 26x) and Mamee (delisted at PER 13-14x). ‘Cbox’ me if you find anything cheaper. By attaching PER of 8-10x, this stock should be valued at RM2.20-RM2.73. Dividend yield will likely be around 4-5% based on its historical dividend payout. 

Market Data: 

Shares issued: 93.31mil 

Market Cap: RM143.7mil 

Net profit for FY12-13: RM21.7mil-RM25.5mil 

PER for FY12-13: 6.6x to 5.6x 
Net Gearing: 9.2% 
Dividend yield: 4-5% 

Acquisition of land: The company just purchased a land worth RM5.8mil situated in Kuala Langat, Selangor for the construction of warehouse and factory with a combined built-up area of 100k sqft coupled with an office building with built-up area of 4,500 sqft. The land is expected to free up the needed working space of Able Dairies' facility and allow the Able Dairies to include additional milk canning line which could increase production capacity by 25%. This facility will also help the company to save RM0.2mil rental as the company is renting warehouses to store its raw materials and finished products. 

Warrant: Exercise price for its warrant is RM2.28 which will be expired in 5 years. The exercise price set at such a high price at a premium of 43.4% to current price (RM1.59). This probably reflects the confidence of the management towards the company's prospects and the fair value for the company's shares which should likely be higher than RM2.28. 

It is worth noting that the major shareholders who are also directors of the company coupled with Able Dairies' director, Ng Keng Hoe, have been purchasing the company's shares over the past few weeks.

Some recap from my post on 4 May 2012:
The company is also planning expansion plans to increase capacity by 10% over the next 6 months and potentially up to 30%. In addition, the company is seeking to enter Myanmar which has huge growth potential. 95% of Able Dairies products are exported to Africa, Mideast and other poorer SEA countries where their people likely can't afford milk which had multiplied in prices over the past few years (200% rise). Condensed milk probably moved up 30% only over the past 5 years. Able Dairies is pretty much the same as Can-One's F&B as Can-One's F&B also manufactures sweetened condensed milk and evaporated milk which are exported to the same countries. Can-One's venture into this F&B had yielded good profits over the past few years and I expect Johore Tin to follow suit.

Sunday, November 18, 2012

Scientex Bhd (RM3.15; TP:RM3.94): A good long term investment prospect which has a new venture into F&B

The company is one of the world’s leading industrial packaging manufacturers with various products such as stretch film, laminated bags, bulk bags, corrugated carton boxes etc. It is the 5th largest stretch film manufacturer in the world and the largest in Asia with 33% market share. Its products are being exported to over 60 countries around the world. Scientex is also involved in polymer manufacturing business supplying automotive interior products to auto manufacturers such as Subaru, Nissan, Toyota, Proton, Perodua, Honda, Suzuki and Yamaha. 

Besides its manufacturing business, Scientex established itself as a successful property developer focusing on affordable housing with property development in Johor and Melaka. 

Earnings prospects: 
The company achieved a net profit of RM84mil with revenue of RM881mil for FY7/2012. Packaging manufacturing and property development accounted for 33% and 66% of the earnings respectively and this proportion had been rather consistent over the past 2 years. Nonetheless, the manufacturing division is expected to grow more aggressively with the proposed acquisition of GW Plastic Bhd which will be completed by 1Q2013 coupled with the expansion plans of its production capacity. 

Scientex proposed to take over GW Plastic Bhd early Oct 2012 at a price of RM283.2mil, which would be at PE of 13.2x based on net profit over the past four quarters of RM21.5mil. GW Plastic Bhd is a flexible plastic packaging manufacturer mainly for the F&B market with stretch film production capacity of 34kMT. With the acquisition of GW Plastic, Scientex’s production capacity could increase from 120kMT to 154kMT per year, a 28% increase. In addition, Scientex could leverage on GW Plastic’s exposure to recession-proof F&B industry of which Scientex has little or no presence, coupled with synergistic benefits resulting from economies of scale. It is interesting to note that GW Plastic’s revenue and earnings per MT of production double that of Scientex, implying that selling prices of packaging products for the F&B industry are much higher. This bodes well for Scientex which is expanding into the more lucrative F&B business. As for expansion plans, Scientex will boost its production capacity from 154kMT per year post acquisition to 194kMT per year by 2013, of which 10kMT/year of the total increase of 40kMT/year will be contributed by GW Plastic. 

Assuming similar margins and expansion plans go as planned, GW Plastic and Scientex manufacturing division could contribute net profit of RM24mil and RM35mil respectively. If net profit from property development remains constant at about RM55mil, total profit could be at RM114mil per year. Taking into account the interest expense to be incurred from the RM200mil loan to finance acquisition of GW Plastic, net profit should be around RM105mil to RM110mil. ROE could expand from current 15% to about 20%.  

Having said that, I haven’t even imputed the potential cost savings from synergies between the two companies and potential lower oil prices coupled with property earnings growth underpinned by its RM171mil unbilled sales, all of which could give earnings surprises. 

Assuming net profit of RM110mil for 2013, PER 2013 is only at 6.6x. Dividend yield will be at 4.5% which is fairly commendable. By attaching PER of 7x to its property development and PER of 10x to its packaging manufacturing division, its target price should be at RM3.94. I see no reason why PER of 10x should not be attributed to its packaging business which is one of the largest in the global market. Just look at Daibochi or Tomypak which are trading at forward PER of 11x and 6.6x respectively, yet they are less than half the size of Scientex post acquisition in terms of revenue and earnings. It’s equally affirming that Lim Peng Jin, the MD of the company who holds 49.8% stake, had been buying up shares at share prices of RM3.06 to RM3.22 over the past few weeks. An 8 sen dividend per share will be paid out by 31st Jan 2013, ex-date on 10th Jan 2013.

Market Data:
Shares outstanding: 230mil
Market Cap: RM729.1mil
PER'12-13: 8.7x-6.6x
Div Yield: 4.5%

Thursday, October 18, 2012

What to do with plantations now?

The rise and fall of CPO prices: 

CPO prices had a good run since end of last year with prices rising from RM2,800/MT in Oct 2011 to RM3,500/MT in April 2012. The rise in CPO prices was a result of a confluence of factors, including the rise in crude oil prices, unfavorable CPO production in 1H2012 coupled with tight supply of soybean in the US due to drought.

What gave way to slide in CPO prices?

Nonetheless, after rising to the peak of RM3,500/MT in Apr 2012, CPO prices reversed direction to fall by 36% to RM2,250/MT in Sept 2012, brought by concerns of oversupply of palm oil, decreased exports to China, more favorable forecasts of soybean oil supply as US drought could have peaked in Sept 2012 and to a lesser extent a drop in crude oil prices (though it rebounded again to RM113/bbl after hitting a trough of US$95/bbl in June 2012).

Strong production in Sept 2012: The sharp drop in CPO prices in Sept 2012 was mainly caused by a surge in palm oil stocks, driven by strong production growth and weak exports. CPO production posted a strong growth of 20.4% mom and 7.2% yoy to 2.004mil MT in Sept 2012 after a lackluster production in the first 8 months of this year. In terms of yoy, Sept month was also the first month to post production growth in 2012. However, YTD production growth was still at -5.1% yoy.

Exports remained weak at -2.6% yoy in Sept 2012 and -3.3% YTD albeit a slight increase of 4.5% mom, as China and Pakistan which are the 1st and 4th largest export market of Malaysian palm oil cut down on exports by 19% and 22% YTD respectively. According to Nomura, China had built up huge stockpile of soybean oil in anticipation of tight supply of soybean oil owing to the drought in US over the past few months, which could be the reason for the weaker palm oil exports to China.

Surge in palm oil stocks: Owing to huge rise in production offsetting the slight mom increase in exports, CPO stocks rose by 415K MT or 35% mom to 1.61mil MT, the highest in more than 5 years. Expectedly, CPO prices dropped more than other competing vegetable oils such as soybean oil and rapeseed oil. Soybean oil prices had been holding up exceptionally well at above RM3,700/MT, a level seen back in early 2011 when CPO prices were trading at above RM3,500/MT. According to HwangDBS, Malaysia might face a shortage of palm oil storage capacity owing to surging inventories. This could further induce CPO exporters to dump more stocks into the export market and add pressure to CPO prices. 

Lackluster CPO prices for now, but won’t be for long?

Malaysia’s CPO export tax cuts and biodiesel program: Malaysia government will abolish duty-free CPO export quota (2012: 5.0-5.6mil MT or ~25% of total Malaysia CPO production) and cut export taxes to 4.5%-8.5% from current 20-23%. These measures could help upstream players to export CPO with reduced taxes (except for CPO producers with duty-free CPO export quota). However, CPO exports in the past never exceeded CPO export quota, thus CPO exporters will actually have to pay more to export CPO owing to the abolished CPO duty-free quota. This will instead benefit downstream players such as refiners as refiners could purchase CPO at prices slightly higher than spot CPO prices net of export tax. The refiners could take advantage of the weaker CPO prices to gain better margins, which could help reduce palm oil stocks. Having said that, these measures will only be implemented starting 2013, thus the impact will be minimal.

On the other hand, the Malaysian government is mulling implementing B10 biodiesel program that could increase CPO consumption by around 300K MT per year to help reduce palm oil stocks. Nonetheless, the timeframe for this program is not known yet, thus its impact to CPO prices might not be visible in the near term.

Discount to soybean prices, potentially create a shift in demand for CPO: CPO prices are currently trading at a substantial discount of 30% or RM1,100/MT to soybean oil, the largest discount since early 2009. It is interesting to note that the price discount will tend to tighten back after reaching 30-35% over the past 10 years, save for the dotcom burst in 2001 and the GFC in 2008. Owing to the expected ongoing tight supply of soybean oil coupled with its higher pricing, substitution effect could take place soon.

A closer look at the stock-usage ratio (S/U) of vegetable oils shows that it has been tightening over the past decade, with 2012/13 being more severe than the previous years. Soybean oil in particular had a sharper drop in S/U as compared to the average S/U of vegetable oils by decreasing from 8.5% in 2011/12 to only 5.4% in 2012/13. On the other hand, S/U of palm oil still holds steady with only a slight drop in 2012/13. Thus, the shortage of soybean oil might cause a shift in demand for palm oil, the closest substitute to soybean oil, to address the shortfall.

What should investors do?

Peak production in Oct: Historically, CPO production usually peaks in Oct and thereafter starts declining to hit the trough in Feb. As such, supply glut could ease over the next few months, provided that exports and consumption remain resilient or pick up again.

KL Plantation Index not falling as much as CPO prices: Despite CPO prices declining by 35% and 26% since Apr 2012 and Jul 2012 respectively, KL Plantation Index only shed around 7%. One of the reasons could be the market perception that the sharp drop in CPO prices would be temporary and does not reflect a new trend for CPO prices. However, should the palm oil stocks remain persistently high aided by weak exports over the next few months, investors might start to take their chips off plantation counters and trigger another correction for plantation counters. It does not help as well for CPO prices when Dorab Mistry, the director of Godrej International Ltd predicted that palm oil stocks could reach 3mil MT from current 2.5mil MT by Jan 2013.

In addition, upcoming quarterly results season is coming with most plantation companies releasing their reports in Nov 2012. There could be further downgrades by analysts owing to  disappointment in earnings. Thus, there is likelihood that plantation counters might undergo further correction before staging a rebound towards the end of the year.

Monitor for now, safer to invest towards end 2012 or early 2013?: For now, it would be safer to remain on the sideline and monitor the palm oil exports (Substitution effect with greater demand for CPO in view of  higher pricing and shortage of soybean oil supply?), MPOB data (Oct will still be a good month for production, thus palm oil stocks could rise even further when monthly MPOB data is out in Nov) and quarterly results of plantation companies (Most will be out in Nov and there could be further downgrades from analysts). CPO prices could recover during 1H2013 back to RM2,800/MT levels as 1H palm oil production is historically lower than 2H by about 25-30%. Wait and see.

KL Plantation Index