Warrants Update: Will Indonesia give CAB-WA another leg-up?

This article first appeared in Capital, The Edge Malaysia Weekly, on April 10, 2017 - April 16, 2017.
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SHARES of Penang-based integrated poultry producer CAB Cakaran Corp Bhd have soared to over 50% in just three weeks. Its warrants, CAB-WA, jumped more than 80% in the same period to RM2 last Tuesday, compared with RM1.09 on March 16. Since March 23, the date of CAB’s annual general meeting, CAB shares have risen 35% over two weeks to RM2.56 last Tuesday while the warrants have gained 43%.

Closing at RM1.95 last Wednesday, CAB-WA fetched a small 0.8% premium to the mother shares, which closed at RM2.48 on the same day. Prior to the recent run, the warrants were at a small discount. That could be why 2.3 million warrants were converted into ­ordinary shares between early February and April 4., filings show. CAB-WA has a 55 sen strike price, one-to-one conversion ratio and expires on Feb 8, 2020.

Is there more upside?

Notably, CAB Cakaran announced on March 31 that it was “extending the memorandum of understanding” it entered into in December 2015 with KMP Private Ltd to study the possibility of forming a poultry joint venture in Indonesia. KMP, which has one CAB board seat, held a 19.22% stake in CAB at the end of last year.

Will the deal with KMP — a unit of Indonesian billionaire Anthoni Salim’s Salim Group — in which CAB would hold 10% to 30% stake in the JV finally materialise?

In a non-rated” report dated March 14, MIDF Research noted that CAB can leverage its relationship with the Salim Group to sell value-added frozen products in the archipelago as the Indonesian conglomerate owns more than 11,000 Indomaret convenient stores and over 500 KFC outlets there.

“We understand that both parties will start building the farms this year,” MIDF said, adding that it expects earnings contribution from FY2019 as it will take another year for the farms to be built and for the chickens to grow, “should everything progress according to plan”.

MIDF, which valued CAB at RM1.89 (12 times FY2017 earnings) when the stock was trading at RM1.69 on March 14, did not factor in any growth potential from the possible Indonesian venture in its assumption.

Based on existing business alone, MIDF expects CAB’s core earnings to grow to RM27 million this year and to RM29.4 million next year on higher capacity and average selling prices, especially with its broiler capacity set to expand further on completion of its purchase of Farm’s Best’s poultry farms. No other analyst tracks CAB, Bloomberg data show.