This article first appeared in Corporate, The Edge Malaysia Weekly, on April 25 - May 1, 2016.
THE long-drawn-out negotiations for the sale of Kian Joo Can Factory Bhd’s assets and liabilities to Aspire Insight Sdn Bhd may have caused investor fatigue.
However, the scrapping of the RM1.47 billion deal, which also saw a planned RM3.30 per share cash distribution being taken off the table, is not necessarily a bad thing for shareholders if they believe Kian Joo’s stock still has value.
For one, the aluminium can manufacturer is not under financial distress that would cause shareholders to want to get rid of their shares quickly. In fact, its balance sheet has improved significantly in the past two years, with a cash balance of RM121.3 million as at Dec 31, 2015.
The group’s fundamentals are also strong.It posted a record net profit of RM131.31 million for the financial year ended Dec 31, 2015 (FY2015), up 8.6% from the previous year, on the back of a 20% revenue growth to RM1.6 billion.
Today, Kian Joo is a leader in the domestic aluminium and tin can packaging market, commanding a 60% market share. Some industry observers even describe Kian Joo as a “gold mine”, having built a business that runs itself.
According to investors who track Kian Joo, news of the aborted takeover exercise actually removed a big overhang on its share price, which has been capped at RM3.30 since the buyout offer was made in November 2013.
A check on Bloomberg shows that on average, Kian Joo’s shares have been trading at around RM3.10 in the last 30 months.
“With the overhang gone, Kian Joo’s stock will be able to move more freely from now on,” a senior corporate observer tells The Edge.
Indeed, investors seem to be reacting positively to the aborted takeover bid as Kian Joo’s share price has risen some 6% since the news broke. The counter closed at RM3.33 last Friday, giving it a market capitalisation of RM1.48 billion.
This indicates that investors are not in favour of accepting the takeover offer as the RM3.30 offer price was deemed as undervaluing Kian Joo, says Minority Shareholder Watchdog Group (MSWG) in its weekly newsletter dated April 22.
“We believe the termination of the proposed disposal would not have any impact on Kian Joo and the group’s financial performance has improved over the past two years,” says MSWG.
PublicInvest Research says it had never been enthusiastic about the deal, deeming the price as somewhat undervaluing the company.
“We continue to like the strong cash-flow-generative abilities of the group. We would suggest accumulation of the stock should the price weaken significantly,” says its analyst Ching Weng Jin in an April 18 report.
PublicInvest Research has raised the rating on Kian Joo to “outperform”, with a higher target price of RM3.52, which represents a potential upside of 5.7%.
It is worth noting that the proposed sale of Kian Joo’s entire business to Aspire Insight has always been seen as an opportunity for Can-One Bhd, another locally-listed tin can manufacturer, to unlock its investment in Kian Joo.
Aspire Insight is 40%-owned by the Employees Provident Fund (EPF) and 60%-owned by a vehicle led by Kian Joo chief operating officer and executive director Freddie Chee Khay Leong.
Can-One is currently the single largest shareholder of Kian Joo with a 32.9% stake. Its controlling shareholder and non-executive director Yeoh Jin Hoe, a media-shy and low-profile businessman, is also managing director of Kian Joo.
Interestingly, Can-One last Monday revealed that several parties, including Kumpulan Wang Persaraan (Diperbadankan) (KWAP), have expressed interest in its subsidiary F&B Nutrition Sdn Bhd, which manufactures sweetened creamers and sweetened condensed filled milk.
On the same day, it was reported that the pension fund was in the final stage of acquiring a 30% stake in F&B. The price tag was said to be RM280 million, valuing the manufacturer at RM933 million.
Some quarters opine that the divestment is to raise fresh funds for Can-One to pare the whopping borrowings that it had assumed when it acquired a majority stake in Kian Joo.
As at Dec 31, 2015, Can-One’s total debts stood at RM542.7 million, of which RM282.2 million were short-term borrowings. Last year, the company incurred interest expenses of RM21 million.
As the offer from Aspire Insight — which would have enabled Can-One to pocket about RM477 million cash — is no longer on the table, some corporate observers opine that Can-One may now have to squeeze more dividends out of Kian Joo, which would in turn benefit shareholders. “They (Kian Joo) have to start the ball rolling, otherwise the shareholders will make noise,” one observer says.
Kian Joo has been able to retain most of its cash and profit as it has not declared any dividends in the two years until the recent announcement of a two sen dividend payment for FY2015.
PublicInvest Research’s Ching believes it remains imperative for Can-One 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.
However, Kian Joo chief financial officer Ooi Teik Huat recently said that no one from Can-One has approached him to ask for higher dividends, adding that the latter has its “own ways to manage its debt”.
“It’s all about perception. Who actually said that Can-One needs money? (But) you need to ask Can-One (because) I’m not at liberty to discuss Can-One,” he told reporters after Kian Joo’s annual general meeting last Wednesday.
Can-One’s Yeoh did not respond to queries from The Edge.
Ooi also noted that Kian Joo has not been paying dividends in the last two years and “they (Can-One) don’t seem to have any problem”.
“As a responsible management, we need to keep the shareholders happy, and at the same time, make sure that we have sustainable growth. We have to review the situation every year,” he says.
Indeed, Ooi stresses that Kian Joo needs to conserve cash for its expansion plan and sustain its earnings growth momentum. Hence, the company might not be able to pay generous dividends.
As at Dec 31, 2015, Kian Joo’s cash pile stood at RM198.9 million against total borrowings of RM377.7 million.
He also says Kian Joo incurred a capital expenditure (capex) of RM191 million in FY2015. In addition, the company’s committed capex was RM136 million as at end-2015.
The company will also invest US$23 million (RM89.24 million) to set up two carton box and packaging plants in Thilawa, a special economic zone in Myanmar.
On Can-One’s debt situation, Ooi says, “Obviously, high borrowings will scare a lot of investors off. But I think the art of financial management is how to manage those debts.”
“As far as Kian Joo is concerned, we have a very good spread of long- and short-term debts. I’m sure the Can-One team is also looking at prudent financial management,” he says.
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