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买复原能力强的股票/冷眼

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Since our initial coverage (www.the1994investor.com) of Johotin back on 7 December 2020, Johotin’s share price has been stable, ranging between RM1.70 – RM2.00. For FY20, Johotin announced a total dividend of 5.4 cents / 2.8% dividend yield based on an entry price of RM1.90.

In this article, we provide an update on Johotin’s latest financial results (4Q2021), announced on 19 March 2021.

UPDATE ON LATEST QUARTER (OCT – DEC) RESULTS

Compared to the preceding quarter, Johotin’s revenue decreased by RM2.7m / 1.9% to RM137.9m. The decline was mainly due to lower sales from its F&B segment caused by higher freight costs which led to cancellation/push back of orders by its overseas customers.

Profitability-wise, Johotin’s gross and net margins were impacted more severely with an overall drop in net profit of RM7.8m / 50.2%. Factors contributing to the declines were:

  • Higher raw material costs i.e. milk, sugar and steel during the quarter
  • Delay in price adjustments to customers order for the tin segment
  • One-off gain from the disposal of property, plant and equipment of RM784k in 3Q2021

UPDATE ON FY2020 (JAN – DEC) RESULTS

On a full-year basis, Johotin’s revenue and net profit dropped by 13.4% and 15.6% respectively. Factors leading to the decline were:

  • Higher raw material costs and
  • Decrease in production and customer orders during the peak of pandemic during 1H2020, and the recent surge in freight cost which led to a push back of customers’ orders

Moving into FY2021, we expect the Group’s business to remain challenging given the increasing price of commodities.


CORPORATE UPDATES

There were no major news / developments on the Group, since our initial coverage.

Do refer to Johotin’s latest corporate presentation dated December 2020 for in-depth updates on the Group’s operation.


VALUATION UPDATES

With reference to Johotin’s latest quarter results, we have made slight adjustments to our projection on Johotin’s FY2021 full-year results, as below.

Assumptions:
1. FY2021 revenue assumed to grow between 5% – 10% which we opine as reasonable and achievable based on Johotin’s past track record.
2. FY2021 GP margin assumed to weaken and range between 20% – 22%. For the past 5 years, Johotin’s average GP margin was 23%, with its lowest GP margin being 19% in FY2020. We expect increase in raw materials prices to put pressure on Johotin’s profitability for the next few quarters.
3. Johotin’s financial position strengthened to a 6-year high net cash holding of RM55m as at 31 December 2020. In 4Q2020, Johotin gained a net interest income of RM7k, as compared to net interest expense of RM284k in 4Q2019.
4. Based on Johotin’s corporate presentation, operations at the Mexico plant are only expected to start production in 1H2021 and the JV should breakeven within its 1st year of operation. However, in 4Q2020, we note that Johotin recorded a share of profit from JV of RM319k. Without much information on the Mexico operation, we would assume a small loss of RM300k for FY2021.
5. FY2021 net margin assumed to range between 5.7% – 7.7%, considering near-term pressure for the high raw material prices. For the past 6 years, Johotin’s net margin average at 6.9%. FY2020 full-year net margin was 7.6%, while 4Q2020 net margin was only 5.3%.

At the last closing price of RM1.80, the market is valuing Johotin at 15x PE based on our base case assumption of RM36.8m in net profit. We opine current valuation as fair given the challenging prospects forward and the little visibility we have on the progress of Mexico’s joint venture.

In the near term, we expect Johotin’s share price to retrace given its recent poor performance and the adverse outlook. Nonetheless, in our views, Johotin’s business fundamentals and industry landscape remain unchanged as before.

We remain confident with the business and management team given their experience and track record when dealing with this cyclical adversity.

To recap, several key risks and opportunities associated to the Group include:

Key Opportunities Key Risks
Experienced management team with more than 20 years of business and industry experience. Further delays with the commencement of production at the Mexico plant.
Reasonable valuation coupled with a consistent dividend payout ratio of ~40%. Dividend yield at >2% p.a. Rising raw material prices i.e. sugar, milk, and steel.
Solid revenue and profitability track record. Able to maintain its margins over the years despite volatility in raw material prices. Shortage of foreign labour supply may result in lower production output and/or high overheads due to overtime expenses.
Strong balance sheet, with a net cash position of RM55m. Intense market competition resulting in depress margins.
Excess capacity to cater for growth at least for the next few years. As of October 2020, the Group’s utilization rate average at 47% only.

Commencement of production in Mexico will provide the Group more capacity to cater to new markets and clients.
 
Rebranding exercise and emphasis on OBM are expected to benefit the Group in the longer term.  

 

https://klse.i3investor.com/blogs/The1994Investor/2021-03-22-story-h1542924616-Johotin_Near_term_pressure_expected.jsp

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