Warrants Update: CAB-WA to benefit from Farm's Best acquisition

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This article first appeared in The Edge Malaysia Weekly, on June 13 - 19, 2016.

PENANG-BASED integrated poultry producer CAB Cakaran Corp Bhd, together with its partners, signed a conditional share sale agreement early this month to acquire Farm’s Best Food Industries Sdn Bhd for RM9.45 million cash.

CAB expects Farm’s Best’s assets, which comprise equipment for farms, hatcheries, poultry processing and refrigeration, to enhance its existing production capabilities and speed up its processing operations, thereby increasing the output of its downstream poultry products.

The counter was traded at an all-time high of RM1.87 on Feb 18, after Indonesian tycoon Anthoni Salim surfaced as the company’s substantial shareholder in January. Year to date, the stock has gained 1.3% to RM1.59, giving it a market capitalisation of RM273.1 million.

CAB’s issued warrant, CAB-WA, appears to be a cheaper alternative for investors who wish to ride the company’s growth and to reap the benefit of the Farm’s Best acquisition.

The five-year warrant, which carries a strike price of 55 sen and a one-to-one conversion ratio, will expire on Feb 8, 2020. The derivative was issued and listed in February last year.

At its last price of RM1, CAB-WA is trading at a discount of 2.5% to the mother share, which closed at RM1.59 last Wednesday. At zero premium, the warrant would theoretically be worth RM1.04. This would present an upside potential of 4%, from its closing price of RM1 last Wednesday.

In a non-rated report dated Feb 22, MIDF Research says the shares of CAB could be fairly valued at RM2.29. This means that at zero premium, CAB-WA would theoretically be worth RM1.74, if its mother share hits the target price. This presents an even higher upside potential of 74% for the warrant.

It is worth noting that the total slaughtering production capacity of CAB is expected to increase by 36,000 birds per day to 110,000 after the completion of the acquisition of Farm’s Best.

The latter’s poultry processing plant in Melaka has an annual capacity of 11.23 million chickens, as well as 12,000 tonnes of meat cuts, sausages and convenience and deli meats.

In a press statement dated June 3, CAB says it is of the view that the acquisition is consistent with its plans to continue expanding its core business.

“Farm’s Best’s assets will provide CAB with readily available facilities to continue expanding its poultry production segment and enable CAB to leverage the common infrastructures to reap economies of scale and operational synergies,” it says.

The acquisition, which is not subject to the approval of CAB’s shareholders, is expected to be completed by the third quarter of this year.