MIDF Research negative on Can-One MGO for Kian Joo

PETALING JAYA: Can-One Bhd’s mandatory general offer (MGO) for Kian Joo Factory Bhd has a steep price tag and may not be earnings accretive, said MIDF Research.

“While this presents an opportunity for Can-One to further increase its share-holding in its associate, additional earn-ings contribution could also be offset by higher borrowing costs.

“We think the premium paid by Can-One for Kian Joo shares in relation to the latter’s market price is steep, as it is 51.3% higher than its five-day volume weighted average price (VWAP), 47.8% higher than its one-month VWAP, 40.2% higher than its three-month VWAP, 30.6% higher than its six-month VWAP and 14.7% higher than its 12-month VWAP,” it said in its report.

Kian Joo’s share price hit limit-up last Friday after the MGO and closed 60 sen or 29.6% higher at RM2.63, while Can-One rose 21 sen or 10.9% to RM2.14.

MIDF Research noted that the indicative offer price represents a 6% discount to Kian Joo’s net asset per share.

“Although the price to earnings ratio (PER) of 15.3 times is within peers’ average, enterprise value to earnings before interest, taxation, depreciation and amortisation (EV/ebitda) of 10.2 times is higher than peer average,” it added.

To recap, Can-One triggered an MGO after acquiring an extra 0.49% in its 32.9%-owned associate Kian Joo from a single shareholder, namely, the former general manager of Box-Pak (M) Bhd Tan Kim Seng.

The purchase consideration works out to RM6.7 million based on its offer price of RM3.10 per share. As a result, Can-One has to make the same offer to other shareholders.

Meanwhile, its major shareholder Yeoh Jin Hoe and parties acting in concert were reprimanded and fined by the Securities Commission Malaysia for failing to launch an MGO for the rest of Kian Joo’s shares after they triggered the 33% threshold.

According to MIDF Research, Can-One’s net gearing could increase to 2.19 times from 0.51 times upon full acceptance of the MGO, as Can-One will have to gear up to fund the acquisition.

“We think that 2.19 times is a stretch given uncertain macro economy and business outlook (in view of the still unresolved external issues such as the US-China trade war and Brexit). Historically, Can-One’s net gearing had ranged below 1 time save for 2007 and 2008 at 1.13 times and 1.24 times respectively,” it said.

“Based on our estimation, the 0.49% purchase will not have a meaningful impact on its FY19F earnings but, depending on the MGO acceptance levels, will have negative impact in a range of 8% to 30% due to higher finance costs, which could possibly offset the higher earnings contribution from Kian Joo,” it added.

MIDF Research retained its “neutral” recommendation on Can-One with an unchanged target price of RM2.09 pending the outcome of the MGO. It said a high acceptance level may result in a downward revision to its target price and possibly a downgrade in its recommendation.

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