Monday 16 January 2012

Kian Joo poised for record profit ahead of takeover

KUALA LUMPUR: Kian Joo Can Factory Bhd (KJCF) looks poised for a record year of profit against the backdrop of the See family courtroom tussle for the company.

While Can-One Bhd may soon seize control of the majority stake in KJCF which may in turn result in a boardroom struggle, it would appear that in terms of valuation, KJCF is still an attractive counter.

KJCF is a very different animal today from what it was three years ago when Can-One won a bid to acquire a 32.9% stake in KJCF for RM1.68 per share in February 2009. Operations in Vietnam are turning profitable yet valuations are relatively low with share price parity to net assets per share.

TA Research forecast KJCF’s FY11 net profit to rise to RM116.8 million, up 14.5% from RM101.98 million for FY10. Net profit for FY12 is expected to be RM143 million. In line with that expectation, TA Research maintains its “buy” call on KJCF shares with a target price of RM2.58.

Kenanga Research similarly forecasts KJCF’s net profit for FY11 increase 10.6% year-on-year (y-o-y) to RM112.8 million and hit the RM132 million mark for FY12. Kenanga maintained its target price of RM2.38 with a “market perform” call on the counter.

KJCF closed at RM2.16 last Friday, rebounding 15 sen from RM2.01 after falling for one week since it a high of RM2.20 on Jan 6.

In terms of valuation, KJCF is still an attractive counter.

At RM2.16, KJCF is being valued at a price-to-earnings ratio (PER) of 8.47 times and 1.07 times book.

“Since it is a relatively old company, there is a chance some of its assets like land have not been revalued in awhile. On that basis, it would appear that Kian Joo is undervalued,” said an analyst.

While KJCF may be undervalued, the impending acquisition by Can-One reduces the value of buying into KJCF.

TA Research’s report read: “We find the offer price of RM1.65 on the low side as it does not reflect Kian Joo’s true value, as the price was offered four years ago. Assuming the exercise goes through, we advise investors to buy into Can-One for cheaper exposure to Kian Joo.”

Another analyst noted that Can-One’s acquisition would translate into better margins. Combined, both players would be able to command better prices in the market as well as leverage their combined size for better prices from suppliers.

“In terms of PE, manufacturing companies typically value fairly at about 10 to 12 times PER,” the analyst added.

An analyst also said KJCF had more upside potential in Vietnam as most of its earnings had not yet fully matured there as the company only established itself in Vietnam two years ago.

KJCF’s corrugated carton division in Vietnam had reaped RM60.6 million in revenue for 3QFY11 ended Sept 30, up 23% from RM49.2 million in the same quarter the previous year. However, profit before tax was 17% lower due to commodity derivatives and foreign exchange losses.

The company had reported a 32% higher revenue for its carton division in 9MFY11 to RM175 million from RM132.1 million a year earlier mainly due to operations in Vietnam. This resulted in a 90% increase in profit to RM11.8 million in 9MFY11 from RM6.2 million in 9MFY10.

In terms of yield, TA Research and Kenanga Research respectively expect KJCF to pay a dividend yield of 5.2% and 5.8% in 2011 and 6.6% and 6.8% for 2012 respectively.

Can-One recently got the go-ahead from the Federal Court to purchase the 32.9% stake in KJCF. Industry observers have noted that KJCF will unlikely find other legal means to prevent the sale.

One final play from the See family, which controls KJCF, is a rights issue announced in February 2011 which could dilute Can-One’s holdings.

According to TA Research’s report, while the exercise had been granted by the court after Can-One attempted an injunction, Bursa Malaysia has decided put it on hold.

KJCF had reported net profit for the 9MFY11 of RM89.75 million, up 13.81% from RM78.86 million in the previous corresponding period. Revenue in the period was up 11.2% to RM793.54 million from RM713.46 million before.


This article appeared in The Edge Financial Daily, January 16, 2012.




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