INVESTMENT HIGHLIGHTS

• Circular issued to KJCF shareholders

• Intention to privatise KJCF

• KJCF earnings muted in recent quarters but is asset rich

• May not be earnings accretive in the near-term

• Maintain NEUTRAL with an unchanged TP of RM2.75

Circular issued to KJCF shareholders. Can-One has on March 1st issued a circular to Kian Joo Can Factory (KJCF) shareholders on the mandatory general offer (MGO) on the latter. The offer is RM3.10 per KJCF share or RM917.0m for the 66.6% stake in KJCF that Can-One has not already owned. The offer will be open for acceptances until 5.00pm on 22nd March 2019 (Friday), being the first closing date and will close on 30th April 2019 (Tuesday).

Intention to privatise KJCF. In the offer document, Can-One stated does not intend to maintain KJCF’s listing unless it was not able to obtain 75% of KJCF shares. It also stated to continue with KJCF’s business and has no plan to liquidate the latter. Can-One stated that it does not have to sell or re-deploy KJCF’s fixed assets presently, except where such change, disposal and/or redeployment is necessary as part of the process to rationalise KJCF’s business activities and/or directions or to improve the utilisation of resources. It does not plan to undertake any employee separation or redundancy scheme but noted that any changes with regard to staff employment may take place as a result of rationalisation and/or streamlining of the business activities and/or to further improve efficiency of the operations of KJCF. It also clarified that it has not entered into any negotiation or arrangement or understanding with any third party with regards to any significant change in the KJCF’s business or shareholding structure as of the latest practicable date.

KJCF earnings muted in recent quarters but is asset rich. Based on our estimates, KJCF may contribute about 12.8% to Can-One FY19F pre-tax profit if business goes on as usual (Refer to Exhibit 1), which has declined from the ~40% level previously. KJC’s recent earnings had declined mainly due to high raw material costs, thinning profit margin due to competition and pre-operating losses at its Myanmar operations. Based on the offer price, the implied historical PER of KJCF for FY17 and FY18 are 15.3x and 79.7x respectively. On the other hand, the offer price of RM3.10 is a 6.06% discount to KJCF’s net asset per share of RM3.30 as of FY17 and RM3.28 as of FY18 (5.5% discount). What is noteworthy is approximately RM248.9m of KJCF’s properties have not been revalued since 2009. The market fair value of its investment properties are estimated at RM77.3m as compared to RM16.6m in KJCF’s FY17 financial statement.

Source: MIDF Research - 4 Mar 2019