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The dude series

Author: cephasyu   |   Latest post: Mon, 15 Aug 2016, 12:17 PM

 

Dude, what about Canone now?

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I want to start this article by saying I was wrong. In my last article as linked below, I gave a recommendation for Canone, with a TP of RM5.72 on the basis that the milk business is growing in profitability and Canone’s stake in Kian Joo Can Factory Berhad (“KJ”) is a healthy and profitable one.

http://klse.i3investor.com/blogs/rarecharms/91402.jsp

However the 2015 Q4 results came out and it was below expectations. The stock price tanked from RM4.50 to as low as RM3.5. People lost money and so did I. I was surprisingly glad that despite my high TP, nobody blamed me (yet) for losing money based on my recommendation. Perhaps nobody trusted me enough to buy on my recommendation anyway. Haha… aww shucks :(

I personally had no idea why Canone’s milk division and KJ reported lower profitability. I was looking at foreign exposure, commodity prices, USD/RM strength and I couldn’t find out why. KJ had a forex loss of RM8m (what.. why?) and Canone had marginal forex gains when both the USD and VND were stable against the RM in Q4 2015.

I hypothesize that it could be due to customer pressure for lower prices (I do not have data to prove this), while raw materials although have decreased in price are still priced in USD, muting cost savings.

The other recent development is an article in the Star newspaper that most of you should be familiar with.

http://www.thestar.com.my/business/business-news/2016/03/12/canone-mulls-sale-of-condensed-milk-ops/

In this article, it says that sources (this is hella dodge) claim that KWAP is interested in buying up to 80% of Canone’s milk division and Canone is seeking a valuation of 20X PE. In any case, I decided that as a follow-up to my previous article, I needed to re-run the numbers to find out the new valuation. First of all, a revision of KJ’s offer price from Aspire and TTC. 

KJ’s NTA has increased significantly from 2013, but PAT disappointed, only increasing 2% since 2013.

Next, I revised the two base case and optimal case valuation based on the latest result. 

As you can tell, the TP for both has dropped notably. However, in light of recent events, I need to readjust some valuation multiples. I call this new valuation the revised case (how original). 

 

I need to explain a few things here. First of all, I understand people are arguably concerned about the RM542mil of debt on Canone’s books. Out of this, approximately RM200mil is used for currency trade loans, bills receivable financing and BA. These are mostly trade financing loans which aren’t like term loans. They are short term loans to finance raw material purchases. To understand more, please refer to the appendix of Icon8888’s interesting article on EG.

http://klse.i3investor.com/blogs/icon8888/90015.jsp

Besides that, another RM218mil was used to finance the KJ acquisition which is paying for its own financing cost. Therefore, I don’t think there’s too much to worry about for the remaining RM100mil term loans.

On top of that, in my valuation, I assigned the general cans business a PE of 8 and a value of RM64mil. This business has assets worth RM302m and I’m assigning a fifth of its asset value. I would say that’s prudent enough.

From the Star article, for the dairy division, it states that “The plan is for the asset to be listed a valuation higher than 20 times earnings, so this is the potential upside for the buyer now.” I am going to discount this to a PE of 15, following my optimal case. Finally, to take a more prudent stance, I will use the original Aspire offer price of RM3.30 instead of the revised ones. With all these revision, we arrive at Canone’s value of RM5.55 (dude, you can’t fudge numbers like these).

Conclusion

I understand that we all need some margin of safety. Discount it even further, personally on your own. If you want a margin of safety of 50%, then your TP is RM2.27, please pass on this. If you think you need 20% margin of safety, then your TP is RM4.44. I am only here to give you a reference model with a price.

For me personally, I’ll take the Rm5.55 bet which I’ve already embedded a whole bunch of discounts into it. Nevertheless, the choice is yours. I could be wrong (again) and if I am, please let me know gently :)

 

Happy trading/ investing ya’ll

Cephas

 

 

 

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Labels: CANONE

Related Stocks

Chart Stock Name Last Change Volume 
CANONE 2.80 -0.05 (1.75%) 267,600 

  2 people like this.
 
Ricky Yeo 1. If your TP is reflecting the value of Canone, you will mostly only find out in the long term, not 1 month
2. In estimating next quarter EPS, even analysts got it wrong, given how many information they have. And it will make sense for them to jump into a different industry you will expect bumpy ride
14/03/2016 17:25
cephasyu JT Yeo, you're absolutely right.

I may be wrong here, but I am writing that new information may provide a catalyst for short term movement. however in the long term, unless there's a shift in the environment or business, the TP should prevail.
14/03/2016 18:24
Ricky Yeo yea the hard thing about investing is feedback loop. The faster feedback we receive, the quicker we can improve. But investing, it takes months or years. Let me know if you are interested to read Superforecasting. It will help you to improve your forecast skill
14/03/2016 19:02
soojinhou Thanks for sharing your analysis. My biggest fear regarding Canone is that there is a fundamental shift in the industry. This quarter, all 3 can producers Canone, Kianjoo and Johortin posted poor results. I wonder whether the prediction made in the past regarding tin can being a sunset industry is coming true. Many predicted the demise of the industry from competition from plastic. And why not? Plastic is cheaper and easier to manufacturer.

Another troubling sign is Aspire Insight seeking another extension from 31/9/15 to 31/3/16. They have years to do their due diligence, and yet when it's time to close the deal, they kick the can down the road, no pun intended. And despite a lot of talk, Toyota Tsusho has not thrown in it's hat. Are both companies waiting for more clarity on the prospect of the industry? I don't know.

We will know in 2 weeks time whether the Aspire Insight will close the deal. Fasten your seatbelts.
14/03/2016 19:19
jingwei Thank you for the write up. I am investing in Canone too and have no idea too why a poor result was reported. Totally agree with soojinhou statement. I'm worried about the future of this tin can industry too. As for now I just keep an eye on it.

Btw, JT Yeo, is that a book? I am interested to read please.
15/03/2016 00:08
HENGYUAN sexy babe @ RM21 The assumption is danger
15/03/2016 01:02
cephasyu Hey JT, I am very interested in reading superforcasting. Hook a brother up. cephas.yu@gmail.com

Soojinhou, you're right. If there's a shift in the industry, we just gotta keep our eyes peeled to ensure that we don't die while it goes down. Johotin is a little different though, they have a lot of teething issues with their new factory, and therefore are registering very weak profits. Finally, you're absolutely right about the risk of Aspire extending again. We should expect an announcement by next week if they're kicking the can down the road again.

Paperplane, I agree with you. The assumptions are always dangerous, and I may be completely off. I basically try with the best reason that I can muster but it may be still completely off. Please change the valuation basis and the math will follow. All the workings are in the article :)
15/03/2016 17:25
dusti To garner confidence in your readers (and win fans) you yourself must be confident of only one TP i.e. 5.55 ringgit.
15/03/2016 22:01
soojinhou I think aspire insight walking away from the kianjoo deal confirmed my worst fear: tin can industry may be in terminal decline.
15/04/2016 15:09
alibabacoming now go in is so-hi . hahaha....
20/04/2016 17:33
HENGYUAN sexy babe @ RM21 The assumption made is dangerous
21/04/2016 23:09
stockmanmy tin can aluminium can, any can will do

in fact, as long as food needs to be packaged , or cartoned the company will be there.
21/04/2016 23:58


 

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