Can-One’s takeover finance costs seen to offset Kian Joo’s potential near-term earnings contributions

This article first appeared in The Edge Financial Daily, on March 5, 2019.
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Can-One Bhd
(March 4, RM2.64)
Maintain neutral with an unchanged target price (TP) of RM2.75:
Can-One Bhd last Friday issued a circular to Kian Joo Can Factory Bhd’s (KJCF) shareholders for the mandatory general offer on the latter. The offer is RM3.10 per KJCF share or RM917 million for the 66.6% stake of KJCF that Can-One does not already own. The offer will be open for acceptance until 5pm on March 22, being the first closing date, and will close on April 30.

 
In the offer document, Can-One states that it does not intend to maintain KJCF’s listing status unless it is not able to obtain 75% of KJCF shares. It also stated that it intends to continue with KJCF’s business and has no plan to liquidate the latter. Can-One states that it does not have to sell or redeploy KJCF’s fixed assets presently, except where such change, disposal and/or redeployment is necessary as part of the process to rationalise KJCF’s business activities and/or directions or to improve the utilisation of resources. It does not plan to undertake any employee separation or redundancy scheme but notes that any change with regard to staff employment may take place as a result of rationalisation and/or streamlining of the business activities and/or to further improve efficiency of the operations of KJCF. It also clarifies that it has not entered into any negotiation or arrangement or understanding with any third party with regard to any significant change to KJCF’s business or shareholding structure as of the latest practicable date.

Based on our estimates, KJCF may contribute about 12.8% to Can-One’s financial year 2019 (FY19) pre-tax profit if business goes on as usual, which has declined from the 40% level previously.

As mentioned in our previous report, we expect Can-One to gear up to 2.2 times to acquire the entire stake of KJCF. We anticipate the finance costs to offset any potential earnings contribution from KJCF in the near term. Earnings impact for FY19 may range from -8% to -30% ceteris paribus.

Our TP of RM2.75 is based on 9.5x FY19F EPS of 28.9 sen as we make no changes to our earnings assumption pending acceptance levels of the offer and more details from management. — MIDF Research, March 4