INVESTMENT HIGHLIGHTS

• Triggered MGO for acquiring additional 0.49% stake

• Net gearing could increase to 2.19x from 0.51x

• Negative view on the MGO

• Maintain recommendation and TP pending outcome of the MGO

Triggered MGO for acquiring additional 0.49% stake. Can-One has triggered a mandatory general offer (MGO) for acquiring an extra 0.49% in 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 RM6.7m 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 a MGO for the rest of KJCF shares after they triggered the 33% threshold.

Net gearing could increase to 2.19x from 0.51x upon full acceptance of the MGO as Can-One will have to gear up to fund the acquisition. We think that 2.19x 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, CanOne’s net gearing had ranged below 1.0x save for 2007 and 2008 at 1.13x and 1.24x respectively.

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 CanOne 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 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. PER of 15.3x is within peers’ average but EV/EBITDA of 10.2x is higher than peer average.

Maintain recommendation and TP pending outcome of the MGO. Our TP of RM2.09 (based on 8x FY19F EPS of 26.1 sen) is unchanged pending the outcome of the MGO. Likewise, we maintain our Neutral stance pending the outcome of the MGO. On this score, high MGO acceptance levels may result in a downward revision to our TP and possibly a downgrade in our recommendation.

Source: MIDF Research - 14 Dec 2018