Aug 21, 2013

buy KianJoo Can Factory Berhad

Net Profit Grew By 37.3% YTD  TP: RM3.70 (%27.6) Last Traded: RM2.90

- Kian Joo’s 1HFY13 net profit of RM62.6mn came in line with our estimates, making up 45.7% of our full year forecast and 52.0%of streets.
- The group also announced an interim dividend of 2.5sen tax exempt and a special  dividend  of  3.75  sen  tax  exempt  same  as  that  announced  in  the corresponding period. Assuming a dividend payout of50%, which we think is  warranted  given  its  rising  cash  pile  of  RM173.1mn  vs.  RM133.7mn  in FY12,  we  estimate  a  dividend  yield  of  5.3%  in  FY13  and  5.8%  in  FY14. Additionally, the board announced that it had aborted the proposed bonus issue and rights issue, which was first announced on 25 February 2011, as it was not deemed to be in the best interest of the group.
-  Net  profit  grew  by  a  staggering  37.3%  YTD  (YoY:+74.5%;  QoQ:  +5.7%) mainly  attributable  to  its  cans  division  which  make up  74%  of  group’s sales.  This  segment  reported  sales growth  of  14.1%  YTD  to  RM459.1mn coupled with an improved operating income of RM71.4mn on the back of improved margin of 3.3ppt to 15.5%.
- The  jump  in  sales  was  mostly  due  to  a  doubling  in  the  aluminium production  capacity  in  the  second  half  of  last  year.  Food  and  beverage, chemicals and paint sectors were the major drivers for this segment.
- Meanwhile,  the  higher  operating  margin  was  driven  by  improving operating  efficiency  coupled  with  the  extension  in  plant  and  machinery useful life beginning this year.
- As  for  its  cartons  division,  sales  grew  by  8.1%  YTD to  RM134.3mn attributed to strong demand from customers in the food and beverage and footwear segment in Vietnam. However, operating margin for the segment contracted  by  2.3ppt  to  RM8.6mn  due  to  the  implementation  of  the minimum wage policy in Malaysia and Vietnam.

below: Kian Joo Result Summary (click to enlarge)

kianjoo results summary

  Earnings forecast maintained.

  The  additional  1.8bn  pcs/year  of  new  aluminium  capacity,  more  than double  the  existing  capacity  and  the  new  carton  capacity  of  84k MT/year - almost triple the size of its existing capacity - are expected to enhance earnings by 24% this year and 9% next year.Furthermore, its superiority in the aluminium cans market, where it  holds  70% market share  locally  -  backed  by  strong  client  base  such  as  F&N,  Nestle, Carlsberg and Pfizer - adds certainty for consistent demand.

  We  have  upgraded  our  PE  on  Kian  Joo  to  11x  (below  +2  SD  from mean) in our last report dated 30 July 2013 as we think it is justified compared  to  more  inferior  packaging  companies  trading  at  a  higher PE. Pegging this new PE to FY14 EPS of 33.6sen, we maintain our TP of RM3.70. Maintain Buy.

by TA Securities

The principal activities of the Company are manufacturing and distribution of tin cans and investment holding.