Friday 28 October 2011

Candy maker Khee San stirs

KUALA LUMPUR: Could something sweet be stirring in Khee San Bhd? The stock has attracted trading interest in recent weeks after a protracted lull.

The catalysts appear to be two unrelated events that market observers speculate could herald some developments for the low-profile firm, including the possibility of its controlling shareholder London Biscuits Bhd (Lonbisco) raising its stake in the candy and sweets manufacturer.

Earlier this month, Lonbisco sold a 33.65% stake in egg and poultry player TPC Plus Bhd to Huat Lai Resources Bhd for RM8.08 million cash, and Permodalan Nasional Bhd (PNB) ceased to be a substantial shareholder of Khee San on Oct 17.

In the past week, Khee San’s shares have seen a significant pickup in trading volume, with an average of over 500,000 shares transacted daily. Last Friday, the stock gained 1.5 sen to 45.5 sen (with a market cap of RM27.3 million) on a volume of 437,500 shares after rebounding from its one-year low of 44 sen on Oct 20.

The jump in trading activity, though somewhat subsided over the past few days, could have been attributed to PNB speeding up the disposal of Khee San shares during the period.

The state-owned fund manager has been paring down its interest in Khee San since May 2009, about 15 months after buying into the candy maker. PNB first emerged as a substantial shareholder of Khee San after acquiring a 26.62% block (15.97 million shares) on Feb 21, 2008. It is not known how much PNB paid for the block but Khee San’s shares on that day closed at 79 sen.

Prior to taking up the sizeable block, PNB only held a 0.5% stake (298,200 shares) in Khee San as at November 2007, according to Khee San’s 2007 annual report.


Now with PNB out of the picture, Lonbisco remains Khee San’s single largest shareholder with its 32.87% shareholding.

Lonbisco surfaced in Khee San four years ago after acquiring a 30.7% stake via a direct business transaction on Oct 24, 2007, before growing its stake to the current 32.87% (19.72 million shares).

When Lonbisco bought into Khee San, it drew criticism for buying at about RM1.50 per share, a steep premium to the latter’s then share price of about RM1. Note that Khee San’s current share price of about 45 sen is now less than a third of Lonbisco’s purchase price.

Investors will be now watching Lonbisco’s next move on Khee San since the former has disposed of its interest in TPC Plus this year for RM8.08 million, and stake in poultry player Lay Hong Bhd last year for RM11.87 million.

A Lonbisco spokesman had earlier told The Edge Financial Daily that the group had no intention of selling Khee San and its wholly-owned subsidiary Kinos Food Industries (M) Sdn Bhd.

An analyst said Khee San appears to be a suitable fit with Lonbisco’s core business of manufacturing cake-based products as the latter expands its product offerings and brands.

“By comparison, the two disposed poultry and egg companies (Lay Hong and TPC Plus) provided less synergy to Lonbisco. While eggs are used in cakes, the poultry companies do not contribute a substantial portion of Lonbisco’s ingredient base”, he said.

“Egg production needs large economies of scale to be profitable as the margin is only about one sen per egg. It is more worthwhile for Lonbisco to buy eggs than to produce them,” he added.

With eggs and vertical integration out of the way, could Lonbisco set its sights on growing its brands and products?

If that is the case, would it aim to grab a bigger slice of Khee San, now that its shares are trading at around one-third of Lonbisco’s earlier entry price and the book value?

A market observer pointed out that at current share prices, Lonbisco (market capitalisation of RM79.5 million) could make an offer for the remaining 40.24 million shares (67.08%) it does not own in Khee San (market capitalisation of about RM27 million at 45 sen a share) for a total of about RM18.1 million. Minus off an amount of RM12.82 million that Lonbisco owes to Khee San, the net outlay could be just about RM5.3 million.

Khee San shares are currently trading at one-third of their net assets per share of RM1.27 per share in FY11.

Its operations have been churning a cash flow even though its net profit for FY11 ended June 30 fell 18.24% to RM3.65 million from RM4.47 million previously.

Khee San attributed the lower net profit to the release of allowances of deferred tax liabilities. For FY11, Khee San’s pre-tax profit soared 58.13% year-on-year to RM3.67 million on revenue growth of 14.32% to RM82.14. Its group operating profit before working capital changes had increased 23.34% to RM8.1 million from RM6.56 million a year ago.

The candy and sweets manufacturer has borrowings of RM36.89 million and cash of RM2.22 million. Its net debt of RM34.67 million translates into a net gearing ratio of 45.4%. There is a sum of RM12.82 million due from Lonbisco which after repayment would pare Khee San’s net debt to RM21.85 million and net gearing to 28.6%.

In the group’s latest annual report, Khee San chairman Datuk Seri Liew Kuek Hin warned of tougher operating environment for the candy maker in the coming year.

“With the ever-rising cost of production, constant pressure from competitive pricing and an expected advent of another round of economic recession, it shall be a strong challenge for us to maintain our current market position and profit record achieved thus far,” Liew said.

However, he said Khee San will endeavour to weather the expected challenges via a host of measures such as cost-cutting initiatives, boosting operational efficiencies and introducing new product offerings.


This article appeared in The Edge Financial Daily, October 28, 2011.
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