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!

Can Small Fish Eat Big Fish? Can One.

Can One's share price has surged 54% in the first 4 days of year 2012, and it will certainly go further up next week.

Can One and Kian Joo has been involved in law suit since many years ago. On 6th Jan 2012, it is reported that Can One has won the case and is allowed to complete its proposed acquisition of 32.9% or 146 million  of Kian Joo's shares at RM1.65 each (currently at RM2.20).

The story of Can One and Kian Joo dispute is summarized here.

Can One and Kian Joo are both in the same business. As of end of year 2011, Kian Joo has a market cap of RM932.7 million, while Can One is at RM157 million which is about 6 times smaller than Kian Joo. If the purchase of the controlling stake in Kian Joo is successful, then Can One will legally takeover Kian Joo.

If Kian Joo's See's brothers know this day will come, they may regret quarreling with each other.

The "take over" should not has major effect on Kian Joo's business unless the whole management is changed into a lousy one. For Can One, it will certainly boost its earning and prospect.

KianJoo: "Can" give bonus?

Kianjoo is initially a family business (See's family) started in the 1950s. The company has never been peaceful since the 1990s. First there are dispute among the directors (or shareholders or family members). Then came the long running on-going lawsuit between the See's family and Can One berhad. Then recently Can One filed another lawsuit against the bonus issue/free warrants proposal by Kian Joo. Despite all this negative issues, surprisingly Kian Joo still manage to sail through the hardship and maintain the status of leader in can/tin manufacturing.

I'm not clear what is really happening among the See's family members. Here are some information I gather so far. The dispute and tussel between the See's family members started since 1991. It is like HK drama series. At that time, the largest shareholder of Kian Joo is Kian Joo Holdings Sdn Bhd which held 37% of Kian Joo's share (currently 32.9%). All of KJ Holdings shareholders are the See's family members. The family dispute resulted in the formation of 2 opposing groups. One group is led by the managing director Dato See Teow Chuan and the other group is led by Anthony See Teow Guan, the executive director or younger brother. Of course both parties have different opinion. The Dato group wants to sell all the shares in KJ Holding but the Anthony group wish to distribute the shares accordingly to the family members. Since the Dato group has 52% in KJ Holdings, KJ Holdings is finally put on sale publicly in 1996. They appointed a liquidator, KPMG for the share sale.

I don't know what's the reason or twist and turn behind it, all the KJ Holdings shares finally were sold to Can One International, which is suppose to be Kian Joo's competitor. Competitor suddenly becomes major shareholder? At this moment all the See's family members are against the "hostile takeover". So a lawsuit was filed which claimed that there was corruption between the liquidator and Can One.

Nevertheless, despite their family issue, all the directors seems able to cooperate well in the company. How good is Kian Joo's business? They mainly produce tins/cans. We can see their aluminium can and tin products everyday: milk powder, milo, condensed milk, sardines, fruits, soft drink, fruit drink, biscuits, chocolates, moon cakes, cooking oil, motor oil, paint, aerosol, ink, chemicals etc. Lets check their customers: Nestle, Dutch lady, Coca cola, Sprite, 100 plus, drinho, pokka, power root, Anmum, Ayam brand, Rex, Cadbury, Vochelle, Julie's, Munchy, etc etc.

Kian Joo's financial results

	Revenue (mil)	Net profit (mil)
2005	654	50
2006	657	29
2007	789	45
2008	876	69
2009	875	49
2010	992	102

Although the profit is not growing consistently throughout the years, the revenue looks encouraging. The business is still consistent and expanding. Drop in 2009's net profit was due to some one-off special company exercise.

Kian Joo earlier in March proposed one-for-two bonus issue and rights issue of one warrant for every four Kian Joo's shares held after the proposed bonus. This looks very attractive! However, Can One, the potential future largest shareholder of Kian Joo opposed and filed a lawsuit against it. Perhaps Can One fears that this exercise will dilute their future share holding in Kian Joo?

Anyway, after the news of objection came out, Kian Joo's share price has tumbled from 2.50 to 1.94 today, despite the annoucement of the impressive 2011Q1 results in which the revenue grows 18% and net profit grows 40% QoQ! This is on track for another record revenue & profit year!

KianJoo: Supported at 100day MA with MACD ready to crossover & RSI below 30%

Personally I think this may be the opportunity to buy Kian Joo's share. I'm not sure when and how the bonus/right issue proposal trial will end. If the bonus/free warrant are given, the price may rally. If the bonus is cancelled, then we can imagine how the share price will react. However, in the long run, I think Kian Joo price is going to grow along with its business. The reasons? Sustainable business, market leader, economy recovery and good management. There may be risk of high commodity price or suddenly Nestle or Coca cola refuse to continue their contract with Kian Joo. At PE of 8.4, EPS 23 cents, dividen yield 7% and NTA 2.01, it really looks attractive, isn't it?