Lately, I have been searching for a company which has good profit margins, a business model which is non-conventional (i.e., not manufacturing, banking, plantation, and trading in nature), and resilient to external market shocks. I hope I have found the right company! This week I will be looking at Cypark Resources Berhad (5184). Cypark is a company that is involved with the provision of environmental solutions. It has 4 main business segments which are: 1. Environmental engineering: Provision of nature conservation and environmental improvement services. 2. Landscaping and infrastructure: Provision of landscape services, project management services, and infrastructure development. 3. Maintenance: Provision of specialist maintenance works on leachate treatment plants, landscape services for parks, and maintenance of public amenities. 4. Green technology & renewable energy: Solar panel, biogas, biomass, waste-to-energy, and other renewable energy project
Johore Tin Berhad (7167) or Johore Tin has 2 main business segments:
1. Tin manufacturing – the manufacture of tin cans, containers and tin plates
2. Food and beverage (F&B) – the production of infant dairy products, milk powder, condensed and evaporated milk, and other dairy beverages
One would assume based on its name – Johore Tin – its main business is tin can manufacturing. Surprisingly, it has shifted its focus over the years from a tin manufacturer to a food and beverage company. This happened back in 2012 when its management decided to invest into the food and beverage business. To be frank, I have never noticed its products in the shopping complex as most of the milk products on display are dominated by popular brands from Nestle, Dutch Lady and Fonterra. I was looking out for Able Dairies’ products on the shelves of Tesco, but I was unable to recognise any of its products on display. Below is a breakdown of revenue based on its business segment.
Chart 1: Split of revenue between business segments
From my quick research, its F&B arm has a global presence. See Picture 1 below. Note the geographical reach of Johore Tin’s products in Chart 2 below.
Picture 1: Global reach of Able Dairies
Chart 2: Geographical split of revenue by regions
From Chart 2 above, revenue contribution from Malaysia was only 28%, while a large portion of revenue is derived from Asia (other than Malaysia) – 49%. If you look at Chart 3 below, revenue grew on a compounded annual growth rate (CAGR) of 16% from 2013 to 2016.
Chart 3: Revenue by region
2. Food and beverage (F&B) – the production of infant dairy products, milk powder, condensed and evaporated milk, and other dairy beverages
One would assume based on its name – Johore Tin – its main business is tin can manufacturing. Surprisingly, it has shifted its focus over the years from a tin manufacturer to a food and beverage company. This happened back in 2012 when its management decided to invest into the food and beverage business. To be frank, I have never noticed its products in the shopping complex as most of the milk products on display are dominated by popular brands from Nestle, Dutch Lady and Fonterra. I was looking out for Able Dairies’ products on the shelves of Tesco, but I was unable to recognise any of its products on display. Below is a breakdown of revenue based on its business segment.
Chart 1: Split of revenue between business segments
From my quick research, its F&B arm has a global presence. See Picture 1 below. Note the geographical reach of Johore Tin’s products in Chart 2 below.
Picture 1: Global reach of Able Dairies
Chart 2: Geographical split of revenue by regions
From Chart 2 above, revenue contribution from Malaysia was only 28%, while a large portion of revenue is derived from Asia (other than Malaysia) – 49%. If you look at Chart 3 below, revenue grew on a compounded annual growth rate (CAGR) of 16% from 2013 to 2016.
Chart 3: Revenue by region
Areas of potential growth
By looking at the breakdown between its tin manufacturing and F&B segment, it can be said that its F&B segment has been showing signs of growth. It recorded a CAGR of 21% from 2013 to 2016. Conversely, its tin manufacturing business has not been growing much, at a CAGR of 4%. See Chart 4 below on the split.
Chart 4: Split of revenue between business segments
By looking at the breakdown between its tin manufacturing and F&B segment, it can be said that its F&B segment has been showing signs of growth. It recorded a CAGR of 21% from 2013 to 2016. Conversely, its tin manufacturing business has not been growing much, at a CAGR of 4%. See Chart 4 below on the split.
Chart 4: Split of revenue between business segments
One would ask, why are its dairy products (F&B) division experiencing growth? It is hard to pinpoint a contributing factor, but I noticed a general theme for dairy products. I managed to get my hands on some great materials from OECD’s Food and Agriculture Organization (FAO) which explains the increasing demand for milk products. Below is what I have summarized from the 2017 OECD-FAO Agriculture Outlook report:
The consumption of fresh and processed dairy products is poised to grow annually by 2.1% per annum and 1.7% per annum respectively, over the next decade. The largest consumption in dairy products is in the form of fresh dairy products, taking in about 50% of the world’s total milk production. Consumption differs between developing and developed countries; developing countries favour fresh milk products compared to the latter, which prefers processed milk products. Additionally, developing countries, particularly Asia, will consume 67% of fresh dairy products. Furthermore, Asia’s share of consumption of dairy products is set to rise to 73% over the next decade.
From Picture 2 below, annual growth rates for milk powder have been experiencing strong growth in developing countries. Demand for this product is also expected to increase for developed countries. This has a positive impact for producers of milk powder. Refer to the RED boxes for the annual growth in skim and whole milk power.
Picture 2: Annual growth rates of per capital consumption for dairy products
(Source: OECD-FAO Agriculture Outlook)
A noteworthy point from the report is that real price (nominal price adjusted for inflation) for both skim and whole milk powder is expected to rise – refer highlighted RED box in Picture 3. For families with infants and couples who are planning for kids, this is bad news. It was noted that the demand for milk products is going to increase due to rising wages, growing population, and other factors mentioned above.
Picture 3: Dairy product prices (FOB export prices)
(Source: OECD-FAO Agriculture Outlook)
Chart 5: Key Financial Information for Johore Tin
From a 4 year profile of its financials, growth is evident. Its F&B segment recorded a CAGR of 21% for revenue and 11% for segment profits, while its tin manufacturing segment recorded a CAGR of 4% for revenue and 10% for segment profits. In terms of profitability, tin manufacturing was more profitable with margins greater than 15%, whereas F&B margins were lower at 6% - 9%.
Overall, in terms of growth and profitability, Johore Tin is relatively decent. Despite the increase in number of shares, Johore Tin still manages to record a higher earnings per share in 2016. Johore Tin’s EPS for the cumulative 9 months of 2017 (Q3 2017) was 8.8 cents; the financial results for Q3 2017 were considered decent.
Chart 6: Financial Position of Johore Tin
Net gearing for Johore Tin has been on a reducing trend. From a net gearing position of 38% in 2015 to a net cash position in September 30, 2017. Further, its current assets were about three times the value of its current liabilities in 2017; its financial position is generally healthy.
What is the investment value of Johore Tin?
Bearing in mind the potential growth in its F&B division, I think its overall valuation appears quite attractive as its current price earnings ratio is approximately 9. For a company with a PE of 9, it recorded a CAGR of 15% in 4 years for profit attributable to shareholders of the company. Considering the increasing demand in dairy products in the future from the Asian region, there should be growth opportunities in this company.
On October 3, 2017, Johore Tin announced that it had subscribed to 40% of the capital stock of Able Dairies De Mexico, for USD40, 000, a joint venture between Able Dairies and Mexican parties. This is another matter for the future as it has not started operations yet. To forecast potential earnings stream for this Mexican venture is almost impossible as there are many new and unknown factors such as political and legal aspects, integrity of management, etc. Hence, I will not be commenting much on this new venture in the meantime.
Investors should take note that investing in Johore Tin does come with potential risks. Competition in the dairy products segment is strong. Just by browsing through the shelves at the stores in KL, I noticed that it is filled with products from Nestle, Fonterra, and Abbot Nutrition. Further, established brands like Fernleaf, Anlene, PediSure, Anmum pose strong competition to other competitors who are not as established. Fluctuation in commodity prices such as sugar is a bane on its costs. However, I think valuations for Johore Tin is still attractive as there is room for growth in the dairy products industry.
Currently, the FBMKLCI has been on a bullish rally. Do check out this article on a technical review of the FBMKLCI to get an idea of its potential trend HERE.
If you like my posts and this blog please SUBSCRIBE in the link above or follow me on Google+ !!! THANKS
Note: This is not a recommendation to buy or sell this stock. The writer does not own shares in this company. The writer intends to share his view point on this stock’s potential investment value, any decision to invest or sell shares in this company is entirely at the reader’s own risk.
The consumption of fresh and processed dairy products is poised to grow annually by 2.1% per annum and 1.7% per annum respectively, over the next decade. The largest consumption in dairy products is in the form of fresh dairy products, taking in about 50% of the world’s total milk production. Consumption differs between developing and developed countries; developing countries favour fresh milk products compared to the latter, which prefers processed milk products. Additionally, developing countries, particularly Asia, will consume 67% of fresh dairy products. Furthermore, Asia’s share of consumption of dairy products is set to rise to 73% over the next decade.
From Picture 2 below, annual growth rates for milk powder have been experiencing strong growth in developing countries. Demand for this product is also expected to increase for developed countries. This has a positive impact for producers of milk powder. Refer to the RED boxes for the annual growth in skim and whole milk power.
Picture 2: Annual growth rates of per capital consumption for dairy products
(Source: OECD-FAO Agriculture Outlook)
A noteworthy point from the report is that real price (nominal price adjusted for inflation) for both skim and whole milk powder is expected to rise – refer highlighted RED box in Picture 3. For families with infants and couples who are planning for kids, this is bad news. It was noted that the demand for milk products is going to increase due to rising wages, growing population, and other factors mentioned above.
Picture 3: Dairy product prices (FOB export prices)
(Source: OECD-FAO Agriculture Outlook)
Chart 5: Key Financial Information for Johore Tin
From a 4 year profile of its financials, growth is evident. Its F&B segment recorded a CAGR of 21% for revenue and 11% for segment profits, while its tin manufacturing segment recorded a CAGR of 4% for revenue and 10% for segment profits. In terms of profitability, tin manufacturing was more profitable with margins greater than 15%, whereas F&B margins were lower at 6% - 9%.
Overall, in terms of growth and profitability, Johore Tin is relatively decent. Despite the increase in number of shares, Johore Tin still manages to record a higher earnings per share in 2016. Johore Tin’s EPS for the cumulative 9 months of 2017 (Q3 2017) was 8.8 cents; the financial results for Q3 2017 were considered decent.
Chart 6: Financial Position of Johore Tin
Net gearing for Johore Tin has been on a reducing trend. From a net gearing position of 38% in 2015 to a net cash position in September 30, 2017. Further, its current assets were about three times the value of its current liabilities in 2017; its financial position is generally healthy.
What is the investment value of Johore Tin?
Bearing in mind the potential growth in its F&B division, I think its overall valuation appears quite attractive as its current price earnings ratio is approximately 9. For a company with a PE of 9, it recorded a CAGR of 15% in 4 years for profit attributable to shareholders of the company. Considering the increasing demand in dairy products in the future from the Asian region, there should be growth opportunities in this company.
On October 3, 2017, Johore Tin announced that it had subscribed to 40% of the capital stock of Able Dairies De Mexico, for USD40, 000, a joint venture between Able Dairies and Mexican parties. This is another matter for the future as it has not started operations yet. To forecast potential earnings stream for this Mexican venture is almost impossible as there are many new and unknown factors such as political and legal aspects, integrity of management, etc. Hence, I will not be commenting much on this new venture in the meantime.
Investors should take note that investing in Johore Tin does come with potential risks. Competition in the dairy products segment is strong. Just by browsing through the shelves at the stores in KL, I noticed that it is filled with products from Nestle, Fonterra, and Abbot Nutrition. Further, established brands like Fernleaf, Anlene, PediSure, Anmum pose strong competition to other competitors who are not as established. Fluctuation in commodity prices such as sugar is a bane on its costs. However, I think valuations for Johore Tin is still attractive as there is room for growth in the dairy products industry.
Currently, the FBMKLCI has been on a bullish rally. Do check out this article on a technical review of the FBMKLCI to get an idea of its potential trend HERE.
If you like my posts and this blog please SUBSCRIBE in the link above or follow me on Google+ !!! THANKS
Note: This is not a recommendation to buy or sell this stock. The writer does not own shares in this company. The writer intends to share his view point on this stock’s potential investment value, any decision to invest or sell shares in this company is entirely at the reader’s own risk.
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