KianJoo ... Aug10

S & P Results Review & Earnings Outlook

• KJCF’s 2Q10 results were above expectations due largely to betterthan-
expected sales and margins at the cans division.

• The cans division saw revenue improve 8% QoQ with a pick-up in demand from the domestic food & beverage sectors. Margins fell slightly to 14.2% from 14.8% in 1Q due to higher raw material prices. We expect strong demand to sustain into 2H10, which is traditionally better due to festive season buying. Additionally, staggered price hikes thus far should contribute to improved margins.

• Corrugated cartons saw revenue jump 15.7% QoQ. Price hikes in 2Q10 averaged 6%-8% but volume growth was also strong. We expect sales to be supported by new capacity in Vietnam which came onstream end-June, doubling existing capacity to 8,000 MT per month. Gross margin rebounded to 6.7% after an exceptionally low 1.8% in 1Q10, which had been impacted by higher raw material prices.

• Revenue from the group’s contract packaging services was stable QoQ but margins were impacted by higher raw material costs, slipping to 0.1% from 4.3% in 1Q10, with higher start-up losses from the group’s outfit in Vietnam, which commenced early this year.

• We raise our 2010 and 2011 net profit forecasts by 9.8% and 9.1% respectively to incorporate higher sales growth for the corrugated cartons division and slightly higher margins.

Recommendation & Investment Risks
• We maintain our Buy call on KJCF but with a higher 12-month target price of MYR1.80 (MYR1.50 previously) on the back of the earnings upgrade and on rolling forward valuations. We like KJCF for its dominant local position in the relatively resilient food & beverage market. Valuations, meanwhile, are undemanding, with the stock trading at a prospective 2011 PER of 7.6x and a P/NTA of 0.8x.

• Our target price is based on a 2010 PER of 8.3x (unchanged), which is based on a 10% premium to the manufacturing sector valuations, and adding on 2010 projected DPS. The premium is to account for KJCF’s broad exposure to the relatively stable food market.

• Surprising positively, management has announced a special DPS of 3.75 sen in addition to its interim DPS of 2.5 sen.

• The status of Can-One’s (CAN MK, MYR1.17, Hold) proposed acquisition of a 32.9% stake in KJCF at MYR1.65 per share for MYR241.1 mln cash from Kian Joo Holdings Sdn Bhd remains unresolved and looks to be a long-drawn process.

• Risks to our recommendation and target price include lower-thanexpected
demand from customers and higher-than-expected raw material costs. Much also remains to be seen as to whether the 32.9% sale to Can-One will materialize, if at all.