Analysts remain positive on Johore Tin’s FY18-19 earnings prospect
KUALA LUMPUR: Following a recent meeting with Johore Tin Bhd (Johore Tin), analysts have reaffirmed their positive view on the group’s financial year 2018-2019 (FY18 - FY19) earnings prospect.
According to the research arm of TA Securities Holdings Bhd (TA Research), this was on the back of persistent downtrend in the milk-based commodity price that will enhance food and beverages (F&B) profit margins, growing demand for vegetable oil packaging products that will support top-line growth for the tin manufacturing segment and maiden contribution from joint venture in Mexico in FY19.
TA Research noted that the main raw material to Johore Tin’s tin manufacturing is tinplates, which are bought locally from Perusahaan Sadur Timah Malaysia (PERSTIMA) as well as imported from China and India.
The research arm further noted that the price of exported tinplate in China has been on an uptrend since the first quarter of 2016 (1Q16) from US$628 per tonne level to US$814 per tonne in October 2017.
“As of October 2017, the tinplate price had increased as much as 13.8 per cent year on year (y-o-y), underpinned by closing down of small iron ore mills with outdated induction furnaces in China.
“Management believes that the price would continue escalating in 2018,” it said.
However, the research arm believed that the price will not exceed the 2013’s average price of US$977 per tonne.
TA Research also noted that Johore Tin adopts the cost-plus approach in pricing the finished tin products.
“As such, the rise in tinplate cost can be fully passed on to the customers, providing a gradual price movement during the three to six months lag time,” the research arm said.
Overall, TA Research believed that the profit margin for tin manufacturing segment will normalise to double digit level for FY18 from 9.5 per cent in the first nine months of 2017 (9M17).
“As far as sales are concerned, management guided that increasing demand for vegetable oil tin packaging is expected to increase, contributing to tin manufacturing top line growth.”
The research arm projected a growth of 5.2 per cent y-o-y in revenue within the tin manufacturing segment for FY18 and FY19.
TA Research also believed that approximately 70 per cent of Johore Tin’s revenues are generated through export sales of tin manufacturing and F&B products while approximately 80 per cent of the group’s costs of goods sold are imported raw materials.
“Hence, Johore Tin being a net importer will benefit from strengthening of ringgit.”
The research arm’s sensitivity analysis found that for every five sen appreciation in ringgit against the dollar, Johore Tin’s net core earnings increases by three per cent y-o-y, ceteris paribus.
On forecasts, TA Research raised its FY17 earnings projections by eight per cent to account for lower-than-expected skimmed milk price and normalising tin manufacturing profit margin.
The research arm had also increased its earnings forecasts by 2.6 per cent and 6.9 per cent for FY18 and FY19, respectively.
This was premised on assumptions that the ringgit will average to RM4.10 per US dollar in 2018 and 2019, as well as commissioning of new plant in Mexico in 4Q18 with utilisation of 30 per cent and 40 per cent for FY18 and FY19 respectively.