INVESTMENT HIGHLIGHTS

• F&B Nutrition to be sold for RM800m to RM1.0b

• Gearing level estimated to fall to 0.55x-0.79x from 1.94x

• Near-term positive but packaging business has a huge void to fill

• Maintain NEUTRAL with an unchanged TP of RM3.65

F&B Nutrition to be sold for RM800m to RM1.0b. Can-One has signed a sale and purchase agreement with Southern Capital to dispose of the entire issued share capital of F&B Nutrition for RM800m to RM1b. F&B Nutrition is an OEM of evaporated creamer and sweetened creamer mainly for the Southeast Asian and African markets. The consideration is based on 10.5x F&B Nutrition FY19 EBITDA less the FY18 net debt of RM107.4m and net capital return of RM26m. The payment will be made in two tranches, the first in cash amounting to RM750m and the remaining to be paid on or prior to a date two years from the completion date in cash or in shares.

Gearing level estimated to fall to 0.55x-0.79x from 1.94x. Recall that Can-One’s gearing level has shot up due to the privatisation of Kian Joo Can Factory (KJCF). With the disposal of F&B Nutrition, its gearing is expected to be pared down as the company plans to repay RM750m of its debt, which is estimated to results in interest savings of about RM38.3m per year.

Creamer business has been more profitable than the packaging business in recent years. Can-One is expected to make a one-off net gain of RM610.8m to RM810.8m from the sale of F&B Nutrition. Prior to the consolidation with KJCF, F&B Nutrition contributed about 60% to Can-One’s FY18 topline. Historically, the creamer segment has also been more profitable compared to the general packaging business. PBT margin for the creamer business ranged from 6.7% to 10.4% compared to 2.5% to 7.8% for the packaging segment. As for KJCF, profit margin for its aluminium can segment had come under pressure while the operating loss at its Myanmar unit may affect its bottomline in the near-term. Management expects four to five years until the two new plants in Myanmar, which started operations in 1Q19, to contribute positively to the group.

Source: MIDF Research - 17 Jun 2019