Can-One’s gearing levels to come down following sale of creamer ops

  • Business
  • Tuesday, 18 Jun 2019

MIDF Research is negative on Can-One's mandatory general offer (MGO) for Kian Joo Can Factory Bhd (KJCF) as the price will be too steep and impact its gearing.

PETALING JAYA: CAN-ONE BHD’s gearing level is expected to come down as the company plans to repay RM750mil of its debt following the sale of its creamer segment, F&B Nutrition Sdn Bhd.

The deal would result in interest savings of about RM38.3mil per year, with the can manufacturer’s gearing levels falling to between 0.55 times and 0.79 times from 1.94 time now, according to MIDF Research.

Recall that Can-One’s gearing level had shot up due to the buyout and privatisation of Kian Joo Can Factory recently.

On Friday, Can-One said it planned to use proceeds from the sale of F&B Nutrition to pare down its debts, especially bank borrowings taken to privatise Kian Joo.

It is expected to make a one-off net gain of RM610.8mil to RM810.8mil from the sale of F&B Nutrition to private equity firm Southern Capital Group Pte Ltd at an indicative price of between RM800mil and RM1bil.

The payment will be made in two tranches. The first in cash amounting to RM750mil and the remainder to be paid on or prior to a date two years from the completion date, in cash or in shares.

MIDF Research said while it is “near-term positive” on the exercise, there would be a huge void to fill as the creamer segment has been the group’s earnings growth driver.

According to the research house, the valuation of 10.5 times earnings before interest, taxes, depreciation, and amortisation is considered fair as F&B Nutrition is largely an original equipment manufacturer and not a brand owner.

“While the deal arrives at a time that allows for Can-One to pare down its debt and to reduce borrowing cost as a result of the privatisation of Kian Joo, it will take time to reap synergies from the enlarged packaging business,” it said in a report.

Prior to the consolidation with Kian Joo, F&B Nutrition contributed about 60% to Can-One’s financial year 2018 (FY18) topline.

The research house also noted that historically, the creamer segment has been more profitable compared to the general packaging business.

“Pre-tax profit margin for the creamer business ranged from 6.7% to 10.4% compared with 2.5% to 7.8% for the packaging segment. Post-disposal, the enlarged packaging business will have to fill up the earnings void left by the more lucrative creamer business.”

As for Kian Joo, profit margin for its aluminium can segment had come under pressure while the operating loss at its Myanmar unit may affect its bottom line in the near-term. Its management expects four to five years until the two new plants in Myanmar, which started operations in the first quarter 2019, to contribute positively to the group, according to MIDF.

On the other hand, the research house noted that the merged entity with Kian Joo would be much more asset-rich, but it remains to be seen how the management would be able to potentially unlock the value of those assets.

“All in, we expect year-on-year normalised earnings per share enhancement of 8% to 44% from the disposal based on a pro forma basis. The enhancement can be mainly attributed to the savings in borrowing cost.”

The research house has maintained its “neutral” call on the stock at this juncture due to the recent jump in share price that led to limited upside in returns.

It also keeps it target price unchanged at RM3.65, which is derived from 0.7 times FY20 forecast price-to-book of RM5.22 that is in-line with its two-year average.

Shares of Can-One closed 4 sen lower to RM3.86 yesterday.

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Cane-One , gearing , level , down , sale , creamer , operations ,


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