Kian Joo on a better footing

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Kian Joo Can Factory Bhd
(Nov 20, RM3.00)
Retain trading buy with target price of RM3.30:
Kian Joo Can Factory’s revenue for the cans division slipped a marginal 0.5% owing to a reduction in exports of its dry food cans and dairy product cans in Vietnam. Pre-tax profit (PBT) fell a sharper 23.8% year-on-year (y-o-y) due to higher utility, labour and materials costs and the additional retirement benefit provision.

The cartons division saw a 33.1% y-o-y decline in PBT, due to reduced sales margins, higher operating costs and start-up losses of its new plants in Hanoi, Vietnam, and Senai, Johor, which amounted to RM5.9 million. Revenue growth was a robust 20% owing to strong demand from customers in the footwear and beverage sectors in Vietnam, in addition to numbers from the new plants.

Since our recent note on Nov 17 and the “trading buy” call, Kian Joo’s share price has popped up 9.4% to a recent high of RM3.14 before settling at the current RM3 (+4.5%) after the Kuala Lumpur High Court struck out Datuk Anthony See’s lawsuit against the company, which essentially clears the way for Aspire Insight Sdn Bhd to proceed with its proposed takeover, shareholder approval notwithstanding.

There’s still the issue of an injunction barring the calling of any shareholder meetings until the resolution of that earlier lawsuit, which is expected to see case management on Nov 24, being largely academic given the recent court decision.

Keeping the faith, which will certainly take some doing given investor fatigue (not to mention analyst fatigue, as we are now the last one standing in continuing coverage on the stock). We continue to believe in the fundamental value of the company. If the proposed transaction materialises, we’ll have a certain RM3.30 per share in our pockets (netting a gain of 30 sen or 10%). If not, we will still see that value materialising, but over the longer term, as it remains imperative for parent-company Can-One to squeeze out further operational improvements (and essentially stronger earnings, thereby increasing its intrinsic value) from Kian Joo for greater dividend income.

Kian Joo’s net profit for the first nine months of financial year 2014 (9MFY14) of RM85.3 million made up only 64% of our previous full-year estimates (which did not account for the one-off retirement provision we estimate to be more than RM10 million), but which would have otherwise still fallen short in meeting only 69% of forecasts.

In light of continued operational challenges, we are lowering our FY14 to FY16 estimates to between 12% and 14% to account for the one-off expense (FY14) and lower capacity utilisations given weaker demand regionally.

With the stock continuing to capture the imagination amid sporadic trading interest, we see opportunities, particularly on market weaknesses, and retain our “trading buy” call with an unchanged target price of RM3.30. — PublicInvest Research, Nov 20

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