Written by Clint Loh
Monday, 12 September 2011 14:26
KUALA LUMPUR: Tin can manufacturer Johore Tin Bhd (JTB) has witnessed the growth of its customers involved in dairy products, in particular the condensed milk segment. It now wants a slice of that pie, which it expects will contribute handsomely to its future earnings.
Last month, JTB announced a proposed acquisition of its customer, Able Dairies Sdn Bhd, a company involved in the business of manufacturing and selling of milk and dairy products, for RM31 million (RM27 million in cash and RM4 million in JTB shares). Since Able Dairies started operating in 2008, JTB has supplied its tin cans.
JTB has supplied tin cans to the leading condensed milk manufacturers in the country — Fraser & Neave Holdings Bhd (F&N) and Etika International Holdings Ltd.
“Our experience with the sweetened condensed milk industry has shown that these products were rapidly growing and are still growing. We saw good potential which could contribute to our group’s profit,” Edward Goh, managing director of JTB, told The Edge Financial Daily recently.
In addition to the potential of Able Dairies, Goh, whose family owns a 22.17% stake in JTB, also believes it is a suitable time to acquire Able Dairies.
“If we wanted to diversify [from tin can manufacturing to dairy products], this was our chance to get in. In another two or three years, Able Dairies would have grown too big for us to take over. So, the timing was now or never,” he said.
Dairy products, particularly sweetened condensed milk, have been growing fast as evidenced by F&N and Etika. From 2006 to 2010, F&N’s dairy segment chalked up a compound annual growth rate (CAGR) of 34.7% in revenue and 41.3% in operating profit. Likewise, Etika’s dairy segment had a CAGR of 27.9% for revenue and 81.4% for profit after tax. The growth is due to organic as well as external growth through acquisitions.
From Goh’s experience, when dairy manufacturers grow to a certain size, they start to manufacture their own tin cans instead of sourcing them externally. This is what happened with F&N and Etika, which stopped purchasing tin cans from JTB few years ago, he said. This is one of the reasons why JTB is looking at diversifying its business.
The range of Able Dairies products from its factory at Telok Panglima Garang in Banting, Selangor.
With Able Diaries, Goh expects JTB’s earnings to more than double in FY12 ending Dec 31, 2012, premised on the net profit guarantee of RM10 million from Able Diaries’ vendors for that financial year. Goh also believes the dairy outfit will achieve an annual revenue of about RM180 million, based on its current performance and expected capacity.
For the six months ended June 30, JTB posted revenue of RM54.2 million and net profit of RM4.16 million. Annualised, its revenue and net profit for FY11 could come in at RM108.4 million and RM8.33 million. In FY10, group revenue and net profit were RM95.6 million and RM6.27 million.
JTB will focus on expanding the business of Able Dairies once the acquisition is approved by its shareholders and completed. Note that Able Dairies is currently installing a new production line, which will increase production capacity by about 40% after its expected completion by end-2011.
Able Dairies exports 80% of its products to Africa, the Middle East, and Southeast Asia. Africa accounts for 30% to 40% of its exports, according to Goh.
In 2006, JTB’s peer, Can-One Bhd, ventured into dairy products via F&B Nutrition Sdn Bhd. Can-One has done well in this venture. In the first six months ended June 30, 2011, Can-One’s dairy segment contributed 53% to the group’s total revenue compared with 39.1% in the previous year.
On its current core business in tin can manufacturing, Goh expects more competitive pricing for its key raw material, tinplated steel (tinplates). Tinplates, which are used to manufacture tin cans, account for around 60% to 70% of JTB’s cost of sales.
This is thanks to the free trade agreement signed between Malaysia and South Korea early last year, which eliminated the 15% import duty for tinplates coming from South Korea, said Goh. He explained that JTB now gets half of its tinplate supply from South Korea, with the rest from Perusahaan Sadur Timah Malaysia Bhd (Perstima), the sole manufacturer of tinplates in the country.
Tinplate itself is not a commodity, but its price is tied closely to cold-rolled steel. Tin constitutes only about 5% to 10% of tinplate cost, said Goh.
The price of cold-rolled steel for 2007 has been about US$650 (RM1,950) per tonne. Prices peaked during the middle of 2008 to early 2009 at US$1,100 per tonne. It was US$900 in July this year.
Although JTB is faced with volatile prices, Goh said it has been able to pass down most of the price changes to its customers. JTB keeps two to three months of stock in hand as a buffer.
As at June 30, JTB had cash reserves of RM15.63 million against total borrowings of RM18.93 million. Its net assets per share stood at RM1.49.
With a closing price of 80.5 sen last Friday, JTB’s stock has produced a 19.71% year-to-date return and has a market capitalisation of RM53.1 million. In the last 52 weeks, it traded between a high of 99.5 sen and low of 53 sen.
With earnings per share of 9.51 sen in 2010 and yesterday’s closing price of 80.5 sen, JTB was trading at a historical price-earnings ratio of 8.6 times compared with its competitors, Kian Joo Can Factory Bhd at 8.75 times and Can-One at 7.44 times.
Listed on the then Second Board of Bursa Malaysia in 2003 and subsequently transferred to the Main Board in 2006, JTB manufactures tin cans of the “three-piece” type — the can body, top lid and bottom end — commonly used to contain food as well as paint and chemicals. It also manufactures plastic jerry cans which are mainly supplied to the edible oil industry.
Its customers are in the food industry which produces products such as biscuits, edible oil, ghee, processed food, beverages, SCM and pineapples, while its other customers are in the industrial sector with products such as paints and chemicals.
JTB is the leader in the pineapple can market. In terms of estimated output capacity per year, it is perceived to be Malaysia’s third largest tin can manufacturer, behind Kian Joo and Can-One.
The local tin can industry is maturing, with key player Kian Joo expanding into other segments of the F&B packaging industry as well as abroad. The diversification of JTB into the dairy products segment should provide it with improved earnings, as it did for Can-One, say industry observers.
This article appeared in The Edge Financial Daily, September 12, 2011.
