JB Foods

UOBKayhian on 7 Mar 2013

Valuation

·      JB Foods (JBF) is trading at 7.41x FY2 PE. A final one-tier dividend of 1 S cents was proposed (interim: 1 S cents), bringing total dividend payout ratio to about 33%.

Investment Highlights

·      Demand for cocoa powder in Asia could rise further. Cocoa grinding in Malaysia, Singaporeand Indonesia climbed 3.6% yoy to 606,622 mt in 2012, according to the Cocoa Association of Asia. Grindings data are typically seen as a proxy for chocolate demand. Cocoa powder, which is largely exported to Asian countries, fell 3.9% yoy in 2012 while cocoa butter which is largely exported to countries in Europe and the US saw a higher decline of 23.4% yoy. As a result, JBF has increased its exports to China, India and Ukraineand may set up representative offices in these countries.

·      Positioning by production capacity. Globally, Barry Callebaut leads with a production capacity of close to 1.2m mt. Guan Chong Bhd is at the fourth position with over 200mt based on the group’s estimate for 2012. JBF has a production capacity of 60,000mt vs an estimate of over 360,000mt installed production capacity in Malaysia for 2012. Following Guan Chong Bhd’s production expansion in Indonesia in 2012, JBF has increased its production capacity to 85,000mt for 2013. Pre-booked capacity is well over 50% and management is expecting to maintain plant utilisation of over 90% for 2013. (2012: 98.8%; 2011: 98.4%). JBF also plans to spend RM0.6m annually on R&D.

·      Call option on PT Jebe Koko in Maspion Industrial Estate in Gresik, Indonesia, and Kakao GmbH near Valluhn-Gallin, Germany.Its plant in Indonesia has commenced production since end-Dec 12, which offers another source of cocoa liquor processing as well as to rationalise export tax savings. Plant utilisation is likely to increase to about 80% in 2Q13. At the same time, the call option is likely to be exercised with the funds from TYJ covering over 90% of the investment cost. A proposed plant in Germany is earmarked to increase its cocoa melting and deodorising processes due to demand for its liquid cocoa butter as energy cost is high in Europe. Completion is likely to be towards end-13 with an investment cost not more than the amount invested in Indonesia.

·      Cocoa bean prices to bottom. One of the contributing factors to the declining average selling price is the decline in cocoa futures prices which are used to set contract or spot prices with JBF’s customers or trading house. Cocoa futures for May delivery on NYSE Liffe Futures are now below US$2,090/mt and look poised to trend down further. JBF is expecting cocoa bean prices to bottom out in 2013.