F&N's Cocoaland purchase could unlock potential

KUALA LUMPUR: A successful acquisition of Cocoaland Bhd may help to bring the cocoa manufacturer to its full potential, although it could be years before Fraser & Neave Holdings Bhd (F&N) realises the benefits, says TA Securities Research.

In a note, the research firm said Cocoaland's weaker financial performance in FY21 could be owing to the unsatisfactory execution by its management, which could be remedied by a more effective management in F&N.

"Given F&N’s management’s track record, F&N may be able to unlock and realise the full potential of Cocoaland.

"However, we believe that it will take a few years before the synergistic benefit of the acquisition will be able to generate

shareholder value and free cash flow for shareholders of F&N," it said.

Cocoaland's revenue and earnings per share peaked in FY16 at RM272.6mil and 19.1 sen/share and have since declined at an annualised 5.1% and 24% to RM210.3mil and 4.86sen/share, respectively, in FY21.

Last Friday, F&N announced the proposed acquisition of the entire equity interest in Cocoaland not already owned by F&N, representing 325.4 million shares or 72.3% share capital of Cocoaland at a cash consideration of RM488.1mil or RM1.50 per share.

Based on Cocoaland’s EPS of 4.86 sen/share and adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM33.53mil for FY21 ended Dec 31,TA opines the acquisition is overpriced, given the price-earnings and enterprise value (EV)/Ebitda of 30.9x and 17.7x respectively.

"We maintain our earnings forecast unchanged, pending shareholders’ approval of the acquisition.

"Based on our pro forma estimate, F&N’s FY22 net profit is expected to reduce by RM2.3mil or 0.65% to RM365.2mil.

"F&N’s FY22 financial leverage is expected to decrease from net cash of RM654.5mil to RM166.4mil upon completion of the acquisition," it said.

The research firm maintained its "buy" call with an unchanged target price of RM33 a share.