Volatility in the USD/MYR exchange rate wreaked havoc on Kian Joo’s (KJC) 1QFY16 numbers, with headline net profit slumping 58.1% YoY to only RM11.9m though this was largely impacted by a foreign currency exchange loss of RM25.2m of which RM22.3m is unrealized. Excluding these, KJC’s core numbers are within expectations, making up 26% of our full-year estimates. Growth is not in question, evidenced by the healthy increase (+23.7% YoY) in revenue. QoQ numbers are understandably weaker owing to seasonality factors. We continue to like the strong cash flow generative abilities of the Group, and see its foray into Myanmar a value-accretive one over the longer term. We are maintaining our earnings estimates (which excludes currency exchange movements), hence the unchanged target price of RM3.52 premised on a 12x multiple to its FY17 EPS of 29.3sen. Our Outperform call is also reaffirmed.

• Cans: Revenue in the cans division continued to record robust growth, higher by 20.1% YoY to RM296.3m for 1QFY16 owing to strong demand from its existing customers. Pretax profits fell sharply however as exchange losses took a big bite.
• Cartons: The story was the same here, with a 29.2%% YoY growth in revenue coming from stronger customer demand, while also aided partly by the appreciation of the Vietnamese Dong against the Ringgit. Pretax profits also declined mainly due to exchange losses, though operating expenses and finance costs rose somewhat.
• Contract packaging: No major surprises, with the division’s 33.3% YoY revenue growth to RM20m attributed to increased demand from customers, a recurring theme for all its operating divisions. Pretax profit growth lagged however, up by only 18.2% YoY likely due to the inability to mitigate unavoidable cost hikes.
• What now? KJC’s share price saw a sharp spike post-cancellation of the deal, which is in line with expectations, though it has come under some selling pressure of late with the Employees Provident Fund paring down its holdings. While this could possibly cause some overhang in the near to medium term, we would suggest accumulation of the stock should the price weaken significantly as the longer-term value of the company remains intact. We believe it remains imperative for now that parent-company Can-One derive stronger earnings from KJC for greater dividend income to mitigate interest expenses and defray loan repayments arising from its initial takeover of KJC though we concede a reported sale of a portion of its dairy manufacturing business could alter the landscape somewhat.

Source: PublicInvest Research - 19 May 2016