Canone: When suitors come calling... (UPDATED)

Latest Corporate Development

There is an article in the Star newspaper yesterday entitled “KWAP in tie-up with Can-One” where the gist is as follows:

(i)     “KWAP confirmed that it is the final stages of completing an acquisition of a 30% stake in Can-One's wholly-owned dairy manufacturing business, F&B Nutrition Sdn Bhd.”

(ii)     “The Board of KWAP has approved in principle the purchase”

(iii)    “KWAP is expected to pay RM280mil for the stake in F&B Nutrition.”

(iv)     “Kamaruzaman said that the deal would entail some conditions for F&B Nutrition to meet and this in turn could result in KWAP owning up to a 40% stake in the company.”

This announcement caught Canone by surprise. The company then made its announcement to Bursa (here) which include this statement:

Can-One Berhad has made due and diligent inquiry (sic) with its directors, major shareholders and all such other persons reasonably familiar with the matter and wishes to clarify that Can-One has been approached by a number of parties (including Kumpulan Wang Persaraan (Diperbadankan)) expressing interest to acquire equity interest in F&B Nutrition Sdn Bhd.

Notwithstanding the denial of knowledge by the company of the negotiation (this being a company's affair, not a shareholder's affair), the deal will likely go through. After all, the buyer seems to be very eager and the price seems to be fairly handsome from the seller's perspective. 

Finally, this potential deal comes in the nick of time after the cancellation of the sale of business by its associate, Kianjoo to Aspire Insight Sdn Bhd. With the fund raised from the sale of 30%-stake in F&B Nutrition, the financial position of Canone would improve. This may have caused its management to signal its withdrawal of support for the Kianjoo's sale of business; causing the collapse of that deal.

Valuing Canone

The 2 main assets of Canone are:

• 100% in F&B Nutrition (valued at RM840 million)
• 32.9% in Kianjoo (market value at RM473 million)

Assuming that the long-term borrowings of RM270 million are used to finance the acquisition of Kianjoo while the short-term borrowings are used for working capital by its own tin manufacturing (not related to Kianjoo's operation) and F&B Nutrition, the value of the company (based on the 2 main assets) is about RM1043 million [RM840 million + RM473 million - RM270 million]. The net assets value per share will be about RM5.43 10.86 [RM1043 million divided by 192 96 million shares issued]. At the current price of RM4.06, the stock is trading at a discount of 25% to its NAV. If we discount that by 50%, the fair value of the stock is about RM5.43.

Results Update

In QE31/12/2015, Canone's net profit dropped 49% q-o-q or 47% y-o-y to RM14 million while revenue dropped by 3% q-o-q or 5% y-o-y to RM236 million. Revenue dropped q-o-q due lower sales of general cans division (due to lower demand for jerry cans) and lower revenue from food products division (due to lower demand for sweetened creamer). Lower sales of food product plus higher material consumption & higher operating expenses led to a drop in PBT for the latter division. Despite lower revenue, general cans division recorded higher PBT due to better contribution by tin cans & lower losses in flexi packaging.


Table: Canone's last 8 quarterly results


Chart 1: Canone's last 36 quarterly P&L results
[Note: P&L diagram displays chronological order from left to right.]

Technical Outlook

Canone's share price is in a tentative intermediate uptrend line, SS with support at RM3.80. It has broken above its medium-term downtrend line, RR at RM3.90 in early April.


Chart 2: Canone's daily chart as at April 18, 2016 (Source: ShareInvestor.com)
 
Canone is in an irregular long-term upward channel.
  

Chart 3: Canone's daily chart as at April 18, 2016 (Source: ShareInvestor.com)

Conclusion

Based on satisfactory financial performance, attractive valuation & potential windfall from a possible sale of a 30%-stake in F&B Nutrition, Canone could be a good stock for trading BUY.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Canone.