This article first appeared in The Edge Financial Daily, on April 19, 2016.

Kian Joo Can Factory Bhd
(April 18, RM3.24)
Upgrade to outperform with a higher target price (TP) of RM3.52: Aspire Insight Sdn Bhd has finally called time on a long-drawn saga, which started back in November 2013, mutually agreeing with Kian Joo Can Factory Bhd to terminate the business sale agreement (BSA) and its ancillary agreements, which would have seen the latter selling its assets and liabilities for about RM1.47 billion. With that, the planned RM3.30 per share cash distribution is also no longer on the table.

We had never enthused over the deal, deeming the price offered somewhat undervaluing the company. With it having been called off and given that we continue to like the strong cash flow-generative abilities of Kian Joo, we are raising our TP to RM3.52, premised on a 12 times multiple of its financial year 2017 earnings per share of 29.3 sen. Our call is raised to “outperform”.

We do not discount other potential offers for Kian Joo, but which we believe will be at higher levels compared to the recent one if any chance of success is expected, underpinning the longer-term valuation of the company.

Kian Joo recently revealed that it had sought for a better price from Aspire in view of its better financial performances over the last two years, to which a conclusion could not be reached. The recent court case in which former executive director Datuk Anthony See Teow Guan filed suit against the company also delayed the process for more than a year, which changed the valuation of the company relative to what was offered in March 2014 (date of the BSA).

Minority shareholders will take encouragement from this fact, in that the company continues to grow with time, and that the gain in the company’s intrinsic value is progressive. We would suggest accumulation of the stock should the share price weaken significantly.

Activity was fairly muted post the one-hour trading suspension last Friday, which gives some comfort that investors believe in the longer-term value of the company.

While parent company Can-One Bhd may see otherwise, we believe it remains imperative for now, as it needs to derive stronger earnings from Kian Joo for greater dividend income to mitigate interest expenses and defray loan repayments arising from its initial takeover of Kian Joo, though we concede that a reported sale of a portion of its dairy manufacturing business for RM280 million could alter the landscape somewhat.

We are imputing a two sen per share payout until we get some clarity on Kian Joo’s stand going forward. — PublicInvest Research, April 18