COCOALAND HOLDINGS BHD has been in the spotlight in the past few week, with the company now looking at a RM463.32 million buyout offer from Hong Kong-listed First Pacific Co Ltd, which is led by Indonesian tycoon Anthoni Salim of the Salim Group.
The RM2.70 per share offer — a generous 32% premium to its last traded price before the announcement — raises the question of whether the confectionary manufacturer could be better off being part of the Salim Group than the status quo, in which Fraser & Neave Holdings Bhd (F&N) holds a 27% stake.
To recap, Cocoaland (fundamental:2.80; valuation:2) had earlier this month received an indicative non-binding proposal from First Pacific to acquire its business and undertaking, including all assets and liabilities. This follows another offer of RM2.20 per share by Navis Asia VII Management Co Ltd, which was rejected.
First Pacific’s proposal will be undertaken through a special purpose acquisition vehicle in which Leverage Success Sdn Bhd, Cocoaland’s largest shareholder with 38%, will acquire a stake. Cocoaland’s founder and executive director Liew Fook Meng and his seven brothers have equity interests in Leverage Success.
Whether F&N — the second largest shareholder — decides to sell its stake to First Pacific will be crucial for the gummy candy manufacturer. First Pacific must have 75% approval from Cocoaland shareholders for the deal to go through.
First Pacific has businesses related to consumer food products, telecommunications, infrastructure and natural resources in the Asia-Pacific.
Its consumer food business is carried out through Indonesian-listed PT Indofood Sukses Makmur Tbk — the world’s largest manufacturer by volume of wheat-based instant noodles — and Goodman Fielder Ltd, a leading food company in Australasia dealing in baked products, dairy products and condiments.
First Pacific has 50.1% equity interest in Indofood and 50% in Goodman Fielder.
Indofood is a core entity within the Salim Group, a major Indonesian conglomerate that has been eyeing several acquisitions in the past year as the country’s income levels have been rising.
It is worth noting that First Pacific, in December 2014, acquired 100% interest in PT Indokuat Sukses Makmur, formerly known as PT Danone Dairy Indonesia, a producer of liquid milk products, for IDR261 billion. The purchase was aimed at obtaining Danone’s milk-based drink Milkuat, to allow the group to cash in the country’s growing demand for such beverages.
Interestingly, Cocoaland has been producing and packing beverages for F&N. However, it also produces its own beverages under the Fruit 10 and Cha brands.
When F&N bought into Cocoaland at RM1.38 per share in 2010 via a private placement, both parties were strategic partners. F&N was able to leverage Cocoaland’s existing bottling facilities, such as “hotfilling”, which allows pasteurised liquids to be filled hot into bottles, effectively extending beverage shelf life by six to 12 months.
Cocoaland, on the other hand, was able to utilise F&N’s established distribution networks and expand its product development.
Coming back to recent developments, if F&N (fundamental: 2.10; valuation: 1.10) agrees to Salim Group’s offer, Cocoaland would be able to expand its foothold in the Indonesian market, currently dominated by gummy candy manufacturer PT Yupi Indo Jelly Gum that has been in the market since 1996.
According to Cocoaland’s 2014 annual report, the company has started to actively penetrate Indonesia’s huge market.
“…our gummy products are gaining popularity and experiencing rapid growth in China, Vietnam, Thailand, the Philippines and Indonesia. Cocoaland is aiming to capture a large portion of the market in these countries whose potentials we believe will add tremendous growth to the group,” the company said.
With the Philippines and Indonesia contributing the bulk of First Pacific’s earnings, Cocoaland would be able to leverage on the group’s distribution channels, as it did with F&N previously.
First Pacific recorded a net profit of US$520.8 million in its financial year ended Dec 31, 2014 (FY2014), against US$620 million a year earlier, according to its annual report. It saw a turnover of US$6.84 billion, against US$6 billion a year before, and is sitting on a cash pile of US$2.08 billion.
Meanwhile, F&N posted a net profit of RM259.4 million in the financial year ended Sept 30, 2014 (FY2014), compared with RM259.5 million a year earlier. Revenue was higher at RM3.81 billion from RM3.50 billion previously, and the company had RM365.38 million in cash as at the end of the financial year.
Should F&N accept the proposal, it will be at a 96% premium, based on the offer by First Pacific and its entry price of RM1.38 per share in 2010.
“At the offer price of RM2.70 per share, this values the company at financial year 2015 forecast price earnings of 18 times based on our forecast. The offer price is a 15% premium to our fair value of RM2.35 per share and represents a 32% premium to its last traded price of RM2.04 per share,” AmResearch says, recommending that investors accept the offer.
For FY2015, the research house forecast net profit of RM25.3 million and revenue of RM274.3 million for Cocoaland.
In FY2014, the company posted a net profit of RM21.91 million, compared with RM22.05 million a year before. The lower profit was on the back of higher revenue of RM260.76 million against RM254.44 million previously.
AmResearch also notes that Cocoaland has not traded at or above the offer price in the past 10 years. The highest the stock hit was RM2.68 in July 2010, which was higher than the offer by Navis Asia.
Cocoaland saw a one-year peak at RM2.50 on June 5, 2015, after the buyout offer was announced. The stock has since retracted to close 4% lower at RM2.04 last Thursday, giving it a market capitalisation of RM411.8 million.
This article first appeared in The Edge Malaysia Weekly, on June 15 - 21, 2015.
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