Johotin: Lackluster But Not Game Over?

Johotin FY14Q4 Financial Result

JOHOTIN (RM mil)	FY14Q4	FY14Q3	FY14Q2	FY14Q1	FY13Q4	FY13Q3
Revenue	104.7	90.7	58.8	61.5	64.6	63.5
Gross Profit	16.0	11.7	5.7	13.3	10.5	13.7
Gross %	15.3	12.9	9.7	21.6	16.3	21.6
PBT	6.6	4.0	-0.5	7.6	4.9	8.2
PBT%	6.3	4.4		12.4	7.6	12.9
PATAMI	5.2	2.9	-0.3	5.1	3.9	5.5
Tin Rev	24.7	21.1	24.8	18.2	19.2	20.2
Tin PBT	4.1	1.3	3.3	3.4	-0.2	3.1
F&B Rev	79.9	69.6	34.0	43.3	45.3	43.3
F&B PBT	3.0	3.0	-3.4	4.5	4.8	5.3
Total Equity	179.9	175.5	174.4	174.8	170.3	168.6
Total Assets	323.6	252.8	253.6	237.2	232.7	223.3
Trade Receivables	70.5	39.4	44.3	38.5	41.0	39.5
Inventories	125.0	81.8	74.1	63.1	58.3	57.1
Cash	25.5	31.1	38.7	40.5	38.3	40.0
Total Liabilities	143.6	77.2	79.0	62.3	62.3	54.8
Trade Payables	54.5	16.1	18.6	13.6	10.3	12.1
ST Borrowings	58.8	35.6	32.9	20.2	21.2	18.0
LT Borrowings	10.5	11.7	12.9	14.1	15.3	11.2
Net Cash Flow	-12.7	-7.1	0.6	2.2	-11.2	-9.5
Operation	-28.7	-9.0	-6.3	4.4	23.4	11.4
Investment	-12.3	-6.7	-2.5	-0.5	-20.6	-10.8
Financing	28.3	8.7	9.4	-1.6	-14.1	-10.2
EPS	5.59	3.15	-0.27	5.44	4.89	5.89
NAS	1.94	1.88	1.87	1.87	1.82	1.81
Net D/E Ratio	0.24	0.09	0.04	Net C	Net C	Net C

If you look at Johotin's latest FY14Q4 result, its revenue, PBT & PATAMI are better compared to both QoQ and YoY.

Comparison to QoQ is not that meaningful as investors know that FY14Q3 result was affected by the spillover of compensation paid as a result of quality issue in FY14Q2.

Compared to previous year corresponding quarter of FY13Q4, total revenue in FY14Q4 increases by a magnificent 62%, while both PBT and PATAMI also rise by a commendable 35% and 33% respectively.

Gross margin of FY14Q4 fell 1% point from 16.3% to 15.3% YoY which is not too bad right?

Is it not a good result?

JOHOTIN (RM mil)	FY14	FY13	FY12	FY11	FY10
Revenue	315.5	241.4	246.4	134.2	95.6
Revenue growth %	30.7	-2.0	83.6	38.6	-10.9
Gross Profit	46.8	50.9	47.6	27.5	19.4
Gross %	14.8	21.1	19.3	20.5	20.3
PBT	17.7	27.1	27.6	14.4	8.6
PBT%	-34.7	11.2	11.2	11.0	9.0
PATAMI	13.0	20.6	22.9	11.0	6.3
PATAMI growth %	-36.9	-10.0	108.2	74.6	26.0
EPS	13.91	22.07	30.86	16.56	9.51
NTA	1.94	1.82	1.67	1.52	1.43
ROE	7.2	12.1	14.7	10.4	6.6

Overall in FY14, revenue grows 30.7% from FY13 but PATAMI drops 36.9%. As a result, ROE drops to only 7.2%.

Gross profit margin drops quite significantly from around 20% in previous years to 15% in FY14.

Tin manufacturing is a mature industry though I think it is still not a sunset business yet. So I can't expect too much growth from this segment.

The attention is on its Food & Beverages segment.

For the last 2 quarters, I'm not sure why Johotin's revenue in F&B segment suddenly shot up so much. Its FY14Q4 revenue in F&B has surged 76% YoY. The problem is, PBT in the same period drops 37% from RM4.8mil to RM3.0mil!

The reason given by management is" unrealized foreign exchange loss arise from the outstanding balances owing to suppliers at the current year quarter".

Johotin registered a foreign exchange loss of RM1.683mil in FY14Q4, compared to a gain of RM0.15mil in the corresponding period last year.

If we add in the forex loss, PBT from F&B segment in FY14Q4 & FY13Q4 are almost the same (~RM4.7mil vs ~RM4.7mil), despite the surge in revenue in FY14. So this set of result, probably contributed by higher admin and distribution expenses, is certainly NOT good enough.

In summary, Johotin's overall FY14Q4 profit is unexpectedly "saved" by its old tin manufacturing segment which has more demand at this time.

       Johotin makes plastic container as well

Johotin's inventory level increases at an alarming rate in FY14Q4. Of course we would expect higher sales to contribute to higher inventories, but its inventories increase by 114% YoY while its revenue increases by 62%.

This is the main reason that contributes to its poor cash flow I guess, and thus the rise in its short term borrowing which pushes up its net D/E ratio to 0.24x from net cash position a year ago.

What are these inventories? Are they mainly raw material or finished products?

The management stock in more raw materials because of low milk price? Or it manufactures more products because of anticipated higher sales? These inventories are perishable...

I try to search for milk price and this is what I found.

I'm not sure whether this chart for class III milk can apply to Johotin's milk. Its management said that milk price actually increased in year 2013 due to New Zealand drought but this is not the case shown in this chart.

Anyway, we can see that Class III milk price drops drastically since the end of 2014. How will it affect Johotin in 2015? Lower selling price, higher margin, or nothing related at all?

It seems like there are 4 classes of milk:

• Class I : used in all beverages milk
• Class II : used in fluid cream products, yogurts, perishable manufactured products
• Class III : used to produce cream cheese and hard-manufactured cheese
• Class IV : used to produce butter and any milk in dried form

Johotin produces condensed milk, evaporated milk & milk powder. So, its raw material can be either Class I, II or IV but Class III... However, I can't find the price for other milk classes.


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Updated on 14 Mac 2015:

Noted this piece of info from i3investor shared by Icon8888 regarding whole milk powder price.

I think this chart is more related to Johotin as it shows the rise in milk price in year 2013.

Milk powder price has dropped gradually as much as 50% since early 2014 and reached bottom in the end of 2014.

Did Johotin stock in more milk powder to take advantage of this situation since its milk powder retail packaging facility is going to be completed soon?

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As mentioned in earlier post, I expect Johotin to be an "at-least-RM20mil-annual-PATAMI" company.

If not because of the approximately RM8mil compensation paid, Johotin can achieve close to this target in FY14.

With new venture into milk powder packaging business, there is still room to grow in my opinion.

       Able Food brands

Johotin's closest competitor is undoubtedly CanOne. I like Canone for its small fish ate big fish story. However, it might be too full at the moment to move forward.

According to Canone's website, it started to venture into F&B segment in 2006 as an OEM of sweetened condensed milk. Evaporated milk production was started in 2009 and then it has first commercial run of sterilized/flavour milk products in 2014.

I don't study Canone in detail and it seems like Canone is not involved with milk powder.

Both companies have factories in Telok Panglima Garang Selangor, both produce almost the same thing, and both also export their milk products mainly to Africa, Middle Ease & SEA etc.

So it's interesting to compare both of them.

RM mil	Johotin	Canone
FY14 Revenue	315.5	898.9
FY14 Gross %	14.8	11.8
FY14Q4 Gross %	15.3	14.6
FY14 F&B Revenue %	72	63
Market Cap	140	396
Net D/E	0.24	0.81
ROAvgE	7.4	12.4
EPS (sen)	13.91	41.85
NTA (RM)	1.94	3.42
Share Price (RM)	1.50	2.60
PE ratio	10.8	6.2
PB ratio	0.77	0.76
FY13 DPO%	9	11

As Canone has significant profit contribution from its associate Kian Joo, I will not compare their PBT/PATAMI.

While I am complaining that Johotin's gross margin has dropped in FY14, it is actually still higher than Canone (14.8% vs 11.8%). 

Johotin's whole year gross profit is negatively affected by quality issue but I'm not sure of Canone's situation.

Johotin's F&B revenue contribution in FY14 (72%) is not much more than Canone (63%).

Canone's ROE is good but its net D/E ratio is quite high, and it is trading at a very low actual PE of just 6.2x!

Both companies are pathetic in dividend payout for their FY13 and their PB ratio are almost the same now.

       Able Dairies' customers 

As world's population is growing, demand for food will also grow, especially in third world countries where Johotin & Canone export their milk products to.

This seems like a low entry barrier business and thus competition should be intense.

I like the fact that Johotin moves into milk powder packaging business in which it imports them from New Zealand and Australia, packs them in Malaysia and then exports to other countries. The milk powder caters for all age groups from infant, children to adults.

Johotin's new factory for retail packaging of milk powder is expected to be ready in Apr-Jun 2015 but as we all know, delay is common.

I'm eager to see how it will contribute to Johotin's top & bottom lines.

My target price for Johotin will be set at RM20mil annual PATAMI. With outstanding shares of 93.3mil, expected FY15 EPS will be 21.4sen. 

So currently it is trading at projected FY15 PE of 7.0x at RM1.50. I will give it a conservative PE of 8x so my target price will be RM1.71.

I just can't be too optimistic with Johotin at the moment as it currently has problems such as tight cash flow, shrinking margin and a bad record of poor quality issue.

As for the case of EPS dilution due to warrants conversion, I might just forget about it as its conversion price is as high as RM2.28.

I hope that in the future it can trade at half of Dutch Lady or Nestle's PE ratio.

Anyway, Class III milk price might be fluctuating like hell, but do we see milk powder price like Enfalac, Dutch Lady & Anlene's prices go up & down? It's actually going up like runaway train that never comes back, and it's travelling fast indeed!