This article first appeared in The Edge Financial Daily on June 3, 2019

Can-One Bhd
(May 31, RM3.43)
Mainain neutral with an adjusted target price (TP) of RM3.65: Can-One Bhd’s core profit of RM7.4 million was below our expectations. The core profit excludes other gain amounting to RM252.3 million arising from the corporate exercise.

During the quarter, the company consolidated the accounts of Kian Joo Can Factory (KJCF), which included a bargain purchase of RM308.28 million.

Reported profit for first quarter of financial year 2019 (1QFY19) rose 747.8% year-on- year (y-o-y) to RM96.9 million mainly due to the consolidation with KJCF as well as gains from the bargain purchase.

Revenue rose 25.9% to RM406.2 million, which is also due to the merger with KJCF. Y-o-y comparison for segmental revenue is not meaningful due to the reclassification following the consolidation.

Estimated earnings for FY19 (FY19E) and forecasted FY20 (FY20F) net profit estimates revised by 10% and 7% to RM50 million and RM63.6 million respectively. We expect the operating costs to remain high in the near term before the company is able to reap benefits from the larger entity as restructuring and streamlining may take time.

We also expect higher borrowing cost to partially offset earnings contribution of the enlarged group.

Maintain “neutral” with adjusted TP of RM3.65. Our new TP is derived from 0.7 times  FY20F price-to-book, which is in line with its two-year average. The change in valuation method is mainly due to near-term anomalies arising from the merger, which is not comparable based on a year-on-year basis.

We are “neutral” on the stock at this juncture due to the recent jump in share price that led to limited upside in returns. — MIDF Research, May 31