Johotin: A Fairy Tale Featuring Dairy?

I started to take notice of Johotin since mid-2013, more than one year after it has completed its acquisition of Able Dairies in the end of 2011.

It was all too late by then.

After the acquisition, Johotin's revenue and profit jumped by leaps and bounds, so did its share price which went up from around 80sen in early 2012 to RM2.23 in Sep-2013.

Johotin was previously only a tin can manufacturer. It ventured into F&B industry in 2011 through Able Dairies which produces condensed milk and evaporated milk.

Soon after the acquisition, Johotin's management already planned to expand its F&B business by increasing production lines and acquiring land for new factory. This caught my attention at the time.

In Nov 2012, Johotin issued rights shares with free warrants which has exercise price of RM2.28 to fund the expansion.

If I was not mistaken, the management also gave some "guidance" on its profit at that time which attracted me.

However, I decided to monitor its quarterly financial results first.

The subsequent quarterly results in year 2013 were not up to my expectation. I expected average RM7mil PATAMI per quarter. 

It just reported about RM5mil PATAMI per quarter in 2013 which was even lower than 2012's figures. As a result, its share price also retreated.

My interest in Johotin was fading away gradually and when it reported loss in FY14Q2 due to product quality issue, it was like a final nail in the coffin.

So I stopped to follow up on Johotin after that, as I think quality issue will surely negatively affect it in this competitive market.

In early Jan 2015, one of my blog reader left a message regarding the stocks he holds and I saw Johotin in the list.

I wonder why Johotin. I know that he is a good investor so I checked Johotin again.

To my astonishment, I found out that Johotin's revenue surged 50% QoQ in FY14Q3 which was the subsequent quarter after it reported loss and quality issue.

Net profit was not that good though, may be due to compensation paid for the quality issue.

This really broke my glasses as I anticipated poorer sales after that.

I like to see increasing revenue of a company and this Johotin's revenue was increasing at a fast pace!

I wanted to know whether this high revenue was due to some one-off reason or not. Was it sustainable?

I then searched the internet and only found an article "Johore Tin Still Bullish On Dairy" on The Edge dated 27 Oct 2014.

I couldn't find out the reason for the revenue surge besides purely more sales in its F&B business.

Below are the extract of important points from the article:

*****

Johore Tin Bhd ( Financial Dashboard) has “put behind” it the product quality issue encountered by one of its condensed milk customers that cost it some RM8 million in compensation in the second quarter ended June of financial year 2014 (2QFY14), and is now revving up its milk powder business and venturing into the manufacturing of retail packs for milk powder as its next “growth catalyst”

And it is doing so with a spanking new RM17 million to RM18 million factory in Teluk Panglima Garang, Selangor.

Regardless of this (quality) issue, Goh (CEO) said the group is still looking at an overall net profit of RM19 million to RM21 million for the full FY14, a little higher than last year’s RM20.6 million, though below its initial target of RM26 million to RM28 million. Net profit for the first half (1H) of FY14 is now at RM4.8 million.

Its new factory in Selangor that will house its new milk powder packaging venture is being built near its subsidiary Able Dairies Sdn Bhd’s existing factory, which will also help ease the latter’s space constraints.

“Currently, Able Food is engaging third party packers to pack the retail packs. Once the factory is ready in the second quarter of next year, it will do most of the packing in-house. Hopefully, we can rake in revenue of US$4 million (RM13.12 million) to US$5 million a month once it is fully functional,” said Goh.

The 100,000 sq ft factory on the 1.6ha tract of land has a milk packing equipment capacity of about 2,000 tonnes per month. Like its condensed milk and milk powder business, the group is targeting the export market to account for more than 80% of its new milk powder packaging business, mostly to the Middle East, Africa and Asia.

“With this new venture, we are hoping our F&B segment revenue will hit RM250 million and above by next year [FY15] — from RM158.3 million in financial year 2013 — to account for about 70% of our estimated group revenue of RM350 million,” Goh said.

While Goh still expects an annual 25% revenue growth from its condensed milk business, he said the milk powder business will be the one driving segment revenue growth in FY15 as it is still selling below its target.

He acknowledged there is competition from other countries, but noted that the group has a ready market in the condensed milk business — retail customers — to kick-start the milk powder business.  

*****

Johore Tin currently has two companies in its F&B segment:

• Able Dairies (acquired 100% in Aug11): condensed & evaporated milk
• Able Food (acquired 80% in Feb13): milk powder

       Able Food: Milk Powder

From the article above, the CEO expects 25% revenue growth in Able Dairies in FY15, while Able Food's revenue will grow to about USD4-5mil per month (RM13-16mil per month) or RM40-48mil per quarter (according to article above, using old exchange rate) after its new factory is ready in FY15Q2 and fully functional.

Johotin's usual total revenue is at approximately RM60mil a quarter. FY14Q3 revenue is at RM90mil. Did the CEO mean a potential RM130mil a quarter in FY16?

Or is the revenue of US$4 million to US$5 million per month above meant for the whole F&B segment and not only the new milk powder business?

I think it is unlikely to be the whole F&B segment as for 12 months of FY14, overall revenue from F&B segment is already RM236mil or average RM56mil per quarter, even before the new factory is ready.

However, if the USD4 to USD5mil per month figures are expected just from the new factory (milk powder), it is too good to be true as it will almost double its already-high current F&B segment revenue.

This potential for growth looks attractive enough for me, especially when the share price was beaten down by quality issue last year.

So I decided to invest in Johotin. I waited for its share price to drop to RM1.30 in early January but it rose to over RM1.50 instead.

Finally I bought some at RM1.50 as I saw no chance for its share price to fall from there before the announcement of FY14Q4 result.

I planned to add more shares only after reviewing its quarterly results but eventually I suddenly felt confident enough to buy them before the result announcement after seeing good results from Canone.

Nevertheless, its latest profit disappoints me in fact, but at least one very positive thing is that its revenue not only sustained QoQ, but reaches a record high.

Its share price drops after the result announcement, may be because of poor cash flow and higher expectation from investors. Perhaps I should only buy its share after the result has been out.

Anyway, I will post my own analysis of its latest result later.

I think there is still risk when investing in Johotin. The management tend to give profit "forecast" which it can't accomplish. So one has to be careful with its revenue or profit guidance.

In the article above, CEO mentioned that the company "is still looking at an overall net profit of RM19-21mil for its FY14" while its half year net profit was just RM4.8mil. Now FY14 net profit turns out to be only RM13mil.

The company's profit target in FY13 was also not met due to New Zealand drought which raised the selling price of milk products and lowered demand.

Personally I see Johotin as an "at-least-RM20mil-net profit-a-year company". So its EPS will be at least 21.4sen with 93.3mil shares.

However, commencement of new production facility may incur higher cost initially and erode its profit.

Johotin still has 23.3mil warrants which will expire in Nov 2017. Its exercise price is at a high of RM2.28 so I don't think EPS dilution is a problem before the mother appreciate 50% from RM1.50.

Anyway, with the release of its latest result of FY14Q4, everything does not look straight forward. It looks promising but it might not be a sure win situation.

Invest at your own risk!