Johotin: Too Much Expectation

Johore Tin FY15Q3 Financial Result

JOHOTIN (RM mil)	FY15Q3	FY15Q2	FY15Q1	FY14Q4	FY14Q3
Revenue	97.9	113.6	90.8	104.7	90.7
Gross Profit	12.1	18.4	14.6	16.0	11.7
Gross %	12.4	16.2	16.1	15.3	12.9
PBT	4.4	9.2	6.1	6.6	4.0
PBT%	4.5	8.1	6.7	6.3	4.4
PATAMI	3.3	6.7	4.0	5.2	2.9
Tin Rev	20.4	20.8	20.9	24.7	21.1
Tin PBT	0.5	2.7	1.3	4.4	1.3
F&B Rev	77.3	93.1	69.9	79.9	69.6
F&B PBT	4.4	7.3	5.2	3.0	3.0
Total Equity	191.5	191.4	184.7	179.9	175.5
Total Assets	307.2	320.2	328.8	323.6	252.8
Trade Receivables	62.3	75.6	42.0	70.5	39.4
Inventories	94.6	112.6	148.2	125.0	81.8
Cash	33.9	21.8	28.9	25.5	31.1
Total Liabilities	116.2	128.9	144.1	143.6	77.2
Trade Payables	21.0	26.9	14.8	54.5	16.1
ST Borrowings	63.7	69.7	95.0	58.8	35.6
LT Borrowings	7.0	8.1	9.4	10.5	11.7
Net Cash Flow	8.3	-3.7	3.4	-12.7	-7.1
Operating CF	18.3	-6.6	-26.7	-28.7	-9.0
Depreciation	5.1	3.8	1.9	7.1	5.3
Investment CF	-8.4	-6.5	-6.5	-12.3	-6.7
Purchase PPE	8.6	6.6	6.5	12.7	7.1
Financing CF	-1.6	9.4	36.5	28.3	8.7
FCF	9.7	-13.2	-33.2	-41.4	-16.1
Dividend paid	3.3	0.0	0.0	1.9	1.9
EPS	3.52	7.16	4.27	5.59	3.15
NAS	2.05	2.05	1.98	1.94	1.88
D/E Ratio	0.19	0.29	0.41	0.24	0.09

Johotin's share price dropped 20% from RM2.80 to RM2.24 in a single day after the announcement of its latest FY15Q3 result.

It's like it has suffered loss or is facing quality issue again.

Without a doubt, Johotin's latest quarterly result is a disappointing one.

Its revenue drops 13.8% while PATAMI drops 50.7% compared to record-breaking immediate preceding quarter.

Stronger USD against MYR is not good for Johotin, as it suffered net forex loss in the past few quarters. So it is expected that there is no escape from losing on forex this time.

I think most investors are anticipating a phenomenal result from Johotin due to recent low raw material price, and excellent performance by its peers.

Nevertheless, Johotin's gross margin actually drops compared both QoQ and YoY, resulting in a poorer result.

I think the main issue for this financial result is lower revenue from F&B and increased cost for tin manufacturing.

There is a RM0.8mil realized forex loss and RM0.5mil derivative gain in this quarter.

On the positive side, cash flow improves with positive free cash flow, while increased cash lowers debt/equity ratio further to 0.19.

Since early Oct15, Johotin's share price rallied non-stop from RM1.50 to RM2.80 before it dived. 

Though it has already exceeded my target price, I did not sell because I thought that it might post a good result.

Furthermore, the price of RM2.80 is actually not too "overpriced" if we expect Johotin to perform better in the future. 

If EPS of FY15Q3 just stays flat with FY15Q2 at 7.16sen, the share price of RM2.80 seems to be quite fair.

Anyway, the truth is that Johotin can't sustain its earning in this quarter.

Can it rebound in the next quarter?

I really don't know. It can get better or get worse.

Johotin's new milk packaging factory seems not ready yet at this time, and the completion might be delayed to FY16.

Once the new factory is in operation, surely revenue will pick up and hopefully its profit will follow.

So I think the chance of it to get better is higher.

Johotin: That's More Like It

Johore Tin FY15Q2 Financial Result

JOHOTIN (RM mil)	FY15Q2	FY15Q1	FY14Q4	FY14Q3	FY14Q2
Revenue	113.6	90.8	104.7	90.7	58.8
Gross Profit	18.4	14.6	16.0	11.7	5.7
Gross %	16.2	16.1	15.3	12.9	9.7
PBT	9.2	6.1	6.6	4.0	-0.5
PBT%	8.1	6.7	6.3	4.4
PATAMI	6.7	4.0	5.2	2.9	-0.3
Tin Rev	20.8	20.9	24.7	21.1	21.4
Tin PBT	2.7	1.3	4.4	1.3	3.3
F&B Rev	93.1	69.9	79.9	69.6	37.3
F&B PBT	7.3	5.2	3.0	3.0	-3.4
Total Equity	191.4	184.7	179.9	175.5	174.4
Total Assets	320.2	328.8	323.6	252.8	253.6
Trade Receivables	75.6	42.0	70.5	39.4	44.3
Inventories	112.6	148.2	125.0	81.8	74.1
Cash	21.8	28.9	25.5	31.1	38.7
Total Liabilities	128.9	144.1	143.6	77.2	79.0
Trade Payables	26.9	14.8	54.5	16.1	18.6
ST Borrowings	69.7	95.0	58.8	35.6	32.9
LT Borrowings	8.1	9.4	10.5	11.7	12.9
Net Cash Flow	-3.7	3.4	-12.7	-7.1	0.6
CFOperation	-6.6	-26.7	-28.7	-9.0	-6.3
Depreciation	3.8	1.9	7.1	5.3	3.5
CFInvestment	-6.5	-6.5	-12.3	-6.7	-2.5
Purchase PPE	6.6	6.5	12.7	7.1	2.8
CFFinancing	9.4	36.5	28.3	8.7	9.4
FreeCF	-13.2	-33.2	-41.4	-16.1	-5.8
Dividend paid	0.0	0.0	1.9	1.9	0.0
EPS	7.16	4.27	5.59	3.15	-0.27
NAS	2.05	1.98	1.94	1.88	1.87
D/E Ratio	0.29	0.41	0.24	0.09	0.04

Johotin's FY15Q2 financial result does not disappoint. It posts the highest ever quarterly revenue and second highest PBT in its history.

Compared QoQ, revenue increases by 25% to RM113.6mil and PATAMI jumps 68% to RM6.68mil.

While its tin manufacturing segment is still suffering from soft demand and higher material cost due to stronger USD, profit margin of F&B segment increases due to higher demand and lower milk powder price.

       Whole milk powder price: Getting even lower

Compared to preceding quarter of FY15Q1, inventories, borrowings and debt/equity ratio fall back to a more comfortable level but trade receivables has increased.

However, operating cash flow improves tremendously in current quarter and the company is able to make net short-term borrowings repayment of about RM25mil in FY15Q2.

Anyway, there is still a realised foreign exchange loss of RM1.5mil in current quarter but it has actually improved compared to RM2.7mil in FY15Q1.

The lower forex loss might be due to lower USD borrowings in FY15Q2. If operating cash flow continue to improve then it might have lower borrowings in Q3.

When I first invested in Johotin early this year, I expect at least RM20mil PATAMI in a year.

With RM10.7mil PATAMI at 1H15, Johotin is definitely on track to achieving this target.

If we annualize 1H15's earning, projected EPS for Johotin will be 22.9sen which means it is currently trading at PE ratio of just 6.4x at share price of RM1.47.

This makes Johotin super cheap as a consumer & dairy stock.

What's more, its new milk packaging factory is still not completed yet!

Johotin's management did mention earlier that this new milk packaging business can generate ~RM40mil revenue a quarter, or USD4mil a month, when fully operational.

Its management hoped that with this new venture, revenue in its F&B segment can hit RM250mil and above by FY15.

Currently at 1HFY15, revenue in its F&B segment has already reached RM163mil and it should surpass RM250mil easily by year end even without the contribution from milk packaging business which has been delayed.

I think the increase in sales is mainly because Johotin has successfully penetrated Central America market.

So, when milk packaging business starts to contribute probably in Q4, it should lift Johotin to a new height.

Johotin: Finally Game Over?

Johore Tin FY15Q1 Financial Result

JOHOTIN (RM mil)	FY15Q1	FY14Q4	FY14Q3	FY14Q2	FY14Q1
Revenue	90.8	104.7	90.7	58.8	61.5
Gross Profit	14.6	16.0	11.7	5.7	13.3
Gross %	16.1	15.3	12.9	9.7	21.6
PBT	6.1	6.6	4.0	-0.5	7.6
PBT%	6.7	6.3	4.4		12.4
PATAMI	4.0	5.2	2.9	-0.3	5.1
Tin Rev	20.9	24.7	21.1	24.8	21.5
Tin PBT	1.3	4.4	1.3	3.3	2.4
F&B Rev	69.9	79.9	69.6	34.0	39.9
F&B PBT	5.2	3.0	3.0	-3.4	5.4
Total Equity	184.7	179.9	175.5	174.4	174.8
Total Assets	328.8	323.6	252.8	253.6	237.2
Trade Receivables	42.0	70.5	39.4	44.3	38.5
Inventories	148.2	125.0	81.8	74.1	63.1
Cash	28.9	25.5	31.1	38.7	40.5
Total Liabilities	144.1	143.6	77.2	79.0	62.3
Trade Payables	14.8	54.5	16.1	18.6	13.6
ST Borrowings	95.0	58.8	35.6	32.9	20.2
LT Borrowings	9.4	10.5	11.7	12.9	14.1
Net Cash Flow	3.4	-12.7	-7.1	0.6	2.2
Operation	-26.7	-28.7	-9.0	-6.3	4.4
Investment	-6.5	-12.3	-6.7	-2.5	-0.5
Financing	36.5	28.3	8.7	9.4	-1.6
Dividend paid	0.0	1.9	1.9	0.0	0.0
EPS	4.27	5.59	3.15	-0.27	5.44
NAS	1.98	1.94	1.88	1.87	1.87
D/E Ratio	0.41	0.24	0.09	0.04	Net C

At first glance, Johotin's latest FY15Q1 result is rather disappointing to me, as I expect it to better FY14Q4.

Its PBT and PATAMI are not only poorer than FY14Q4, they are even lower than FY14Q1.

Nevertheless, it registers net forex loss of RM1.8mil in current quarter, compared to RM1.7mil loss and RM0.3mil loss in FY14Q4 and FY14Q1 respectively.

PATAMI drops QoQ and YoY mainly due to more distribution to non-controlling interest in current quarter.

Anyway, gross margin slowly climbs to 16% in the last 4 quarters even though it is still a distance from 20+% in the pre-quality issue era.

Johotin's last quarter result was saved by its tin manufacturing segment but this time it is the other way round.

Its revenue (-15%) and especially PBT (-70%) in tin segment tumble because of high material cost (purchased in USD) and lower demand.

However, PBT in F&B segment surge 77% compared QoQ despite a 13% drop in revenue which is very good. This is mainly due to lower material cost.

The most disturbing part in Johotin's FY15Q1 report is its short term borrowings which has shot up by 60% in just 3 months time.

As a result, net debt/equity ratio increase to 0.41. Will it go up further?

This looks like game over...

The increase in debt is mainly contributed by poor operating cash flow, even though levels of trade receivables and payables have "normalized" after a sudden surge in previous quarter.

The problem lies in its inventories, which has increased by 135% in one year, and never seem to go down!

There is no explanation on the inventories in its quarterly report but luckily, its FY14 annual report has been released at the same time, and we can know what those inventories are made up of.

From the inventories break down, it seems like the cash are tied up in "Goods-in-transit". It is not finished goods stored in the warehouse.

Raw materials increase by 50% as I expect the company to take opportunity on recent low dairy price.

I don't know why there is a sudden surge of "Goods-in-transit" from RM1.4mil to RM49.9mil in one year. Is it because its export sales experience a sudden surge, or there is some issue during the transport?

Anyway, I feel that this is more positive than negative as those goods should have been sold and just not reaching its destination yet.

Sooner or later they will turn into receivables and then cash. This may explain why the management took only short-term loan.

I'm not too sure whether sales are included in revenue or not if the customers have not receive the goods. If it is not, then those "goods-in-transit" are like "unbilled sales".

Personally I think that those "goods in transit" should be considered sold thus already included in the revenue.

Another positive for Johotin is that it has successfully penetrated into Central America market in 2014 which has contributed as much as RM40mil in revenue.

As the location of Central America is quite far away, is this the reason for the high "goods-in-transit"?

Basically Johotin's investors are waiting for the new milk packaging factory to start its operation.

It is earlier reported that it will be ready in Q2 of 2015 but now it seems like it will be postponed to Q3.

So, investors still need to wait until Q3 or Q4 to see more positive financial result.

Johotin will pay 3.5sen dividend for its FY14 which represents 25% payout from PATAMI. This is almost the same payout ratio compared to FY13 (5sen).

Dividend yield of FY14 stands at 2.3% at share price of RM1.55.

If we annualize FY15Q1 EPS of 4.27sen, projected EPS of FY15 will be 17.1sen. At current share price of RM1.55, it is trading at forward PE ratio of 9x.

As I predict its FY15 EPS to be higher than 17.1sen, I will continue to hold Johotin's shares.

For me, the risk is there but it is not yet game over. 

The game might just about to start.

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.


#####

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?

#####

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!