Kian Joo’s good results — small comfort with takeover

by **Cals** Fri 21 Feb 2014, 20:26

Business & Markets 2014

Written by PublicInvest Research

Friday, 21 February 2014 11:45

Kian Joo Can Factory Bhd
(Feb 20, RM3.16)
Maintain outperform at RM3.15 with a lowered target price of RM3.52: Kian Joo’s financial year 2013 (FY13) net profit of RM118.3 million came in within expectations, just a little ahead of our RM115.3 million forecast. Revenue was largely spot on at RM1.28 billion against our forecast of RM1.27 billion.

This is of little comfort, however, considering the assets and liabilities are on the verge of being taken over, satisfactory due diligence and shareholders’ approval notwithstanding, at an offer price we still see as undervaluing the company. Nonetheless, our “outperform” call is retained on the off chance that the takeover is aborted. Some housekeeping changes will see our FY14/FY15 estimates lowered by 3%, resulting in a slight reduction in fair value to RM3.52 premised on 12 times FY14 earnings per share of 29.3 sen.

The group’s Vietnam operations were a major contributor to the improvement in the cans division, with significant demand coming in from dry food can sales. Pre-tax profit saw a healthy 12.2% year-on-year (y-o-y) increase, partly attributable to improved operating efficiencies. The cartons division saw a 36.6% y-o-y slump in pre-tax profit, however, due to the implementation of the minimum wage policy in Malaysia and and a revision in Vietnam, as well as a derivative loss of RM3.3 million. In addition, the division’s Hanoi operations, which commenced in August last year incurred a RM4.5 million loss.

Recall that on Nov 26 last year, Aspire Insight Sdn Bhd, an entity jointly owned by Ekuiti Merdu Sdn Bhd (wholly owned by the Employees Provident Fund) and Alleyways Sdn Bhd (majority owned by Chee Khay Leong, executive director of Kian Joo) offered to acquire all of Kian Joo’s assets and liabilities for RM1.47 billion or about RM3.30 per share, to be settled by cash. Aspire has until March 14 to complete its due diligence and sign definitive agreements in relation to this offer.

We are not overly enthused about the pricing, but we expect the transaction to be wrapped up by this financial year as it is unlikely the deal will be scuppered. Given that nothing is finalised as yet, and there is no clarity on the form or manner in which the capital repayment is to be made (or the quantum for that matter), the current RM3.15 price range at which the share has traded since the announcement was made is a likely ceiling for now. — PublicInvest Research, Feb 20

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This article first appeared in The Edge Financial Daily, on February 21, 2014.