Can-One Bhd
(Dec 14, RM2.14)
Maintain neutral with an unchanged target price of RM2.09. Can-One has triggered a mandatory general offer (MGO) for acquiring an extra 0.49% of its 32.9%-owned associate Kian Joo Can Factory Bhd (KJCF) from a single shareholder, 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. Separately, its major shareholder, Yeoh Jin Hoe, and parties acting in concert, were reprimanded and fined by the Securities Commission for failing to launch an MGO for the rest of KJCF shares after they triggered the 33% threshold.

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 macroeconomy and business outlook (in view of the still unresolved external issues such as US-China trade war and Brexit). Historically, Can-One’s net gearing had ranged below 1.0 times save for 2007 and 2008 at 1.13 times and 1.24 times respectively.

There is minimal earnings impact with 0.49% stake acquisition but earnings will turn negative if MGO acceptance levels are higher. 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 possibly offset the higher earnings contribution from KJCF.

Negative view on the MGO due to steep price and potentially no earnings accretion. While this presents an opportunity for Can-One to further increase its shareholding in its associate, additional earnings contribution could also be offset by higher borrowing costs. We think that the premium paid by Can-One for KJCF shares in relation to the latter’s market price is steep, as it is 51.3% higher than its 5-day volume weighted average price (VWAP), 47.8% higher than its one-month VWAP, 40.2% higher than its 3-month VWAP, 30.6% higher than its 6-month VWAP and 14.7% higher than its 12-month VWAP. On the other hand, the indicative offer price represents a 6% discount to its net asset per share. Price earnings ratio of 15.3 times is within peers’ average but enterprise value to earnings before interest, taxes, depreciation and amortisation of 10.2 times is higher than peers’ average. — MIDF Research, Dec 14