Can-One has been hogging the limelight but I think the market is still grossly undervaluing the shares at RM1.60.
Can-One has 154.2m shares.
Deal in April/May 2009, Can-One was supposed to buy Kian Joo Holdings Sdn Bhd's 32.9% stake in Kianjoo for RM241.12mil or RM1.65 per share.
Now Kian Joo is RM2.20, which meant that Can-One added "pure profit" on its 32.9% stake to the tune of 2.20/1.65 x 241.12 = RM106m. Divide that by the paid up of 154.2m = RM0.68 per share extra.
Can-One has been illiquid trading around RM1.00 for the longest time, thanks to the court case which was critical to its business outlook.
Let's look at Can-One's results:
INDIVIDUAL PERIOD | CUMULATIVE PERIOD | ||||
CURRENT YEAR QUARTER | PRECEDING YEAR CORRESPONDING QUARTER | CURRENT YEAR TO DATE | PRECEDING YEAR CORRESPONDING PERIOD | ||
$$'000 | $$'000 | $$'000 | $$'000 | ||
| 1 | Revenue | 160,555 | 115,244 | 463,685 | 316,880 |
| 2 | Profit/(loss) before tax | 9,794 | 6,747 | 24,934 | 13,853 |
| 3 | Profit/(loss) for the period | 8,184 | 5,196 | 21,327 | 11,339 |
| 4 | Profit/(loss) attributable to ordinary equity holders of the parent | 7,787 | 4,857 | 20,012 | 10,774 |
| 5 | Basic earnings/(loss) per share (Subunit) | 5.11 | 3.19 | 13.13 | 7.07 |
| 6 | Proposed/Declared dividend per share (Subunit) | 0.00 | 0.00 | 0.00 | 0.00 |
AS AT END OF CURRENT QUARTER | AS AT PRECEDING FINANCIAL YEAR END | ||||
| 7 | Net assets per share attributable to ordinary equity holders of the parent ($$) | 1.3480 | 1.2467 | ||
On their own, they are making around 18 sen EPS a year. Let's take the full 2011 net profit to be RM28m.
Kian Joo's annualised net profit comes to RM110m. Can-One will be able to equity account for its 32.9% stake as it can show that it has "control" of the company by virtue of having the largest single block. Can-One's share of net profits = RM36m.
Technically, Can-One's net profit in 2011 (assuming the KJ deal was affirmed back in Jan 2011) would be RM64m. But one would have to deduct the RM241m loan to buy the stake in KJ, so let's whack 7% interest = RM16m. Hence we are supposedly looking at RM64m-RM16m = RM48m net.
On 152.4m shares, the EPS would be = 31.4 sen.
Then a friend said if Can-One has already arranged for the bank loan. It appears from credible sources, the bank loan has been secured long time ago, and would not be an issue at all.
WHAT ABOUT KIAN JOO?
Some are speculating that KJ will shoot up as well as other member of the See family still in KJ may want to buyback more shares, whatever it is, it is hard to get a similar sized block of 32.9%. Even if KJ move up, it will only make Can-One's holdings look even more attractive. If the other substantial KJ shareholders try to make a G.O. on KJ, it will be at higher levels of 2.50 at least, what a good proposition for Can-One. In fact, the play is all at Can-One not KJ. The dissenting shareholders will find that buying more of Can-One and/or accumulating enough to make a G.O. on Can-One would be a lot cheaper and safer way to secure back KJ.
Will KJ try to dilute Can-One's stake? How? You cannot really do that, in the event of a bonus or warrants, Can-One will still get back the 32.9% share. Only way is to do a rights issue, and that is if Can-One cannot/will not subscribe, you think Can-One is stupid? Any rights issue will be taken up whole-heartedly by Can-One. However, they can now block any corporate exercise with their 32.9% anyway. So, what dilution?
HOW CHEAP IS CAN-ONE?
Can-One was very cheap prior to the court ruling because:
a) the KJ case was overwhelming its existing company's operations as KJ's business is at least 3-4x bigger than theirs
b) no fund was willing to buy their shares because Can-One lost the case before, and was in Federal Court on appeal only
Can-One's valuation should be KJ's valuation because effectively, Can-One can trigger a G.O. at anytime and there would be numerous bankers and private equity willing to fund the G.O. at RM2.30-2.40.
Kian Joo's PER is 8x, let's put a more cautious PER of 7x on Can-One's 31.4 sen = fair value = RM2.20
Can Can-One Takeover Kian Joo?
Sure can but very unlikely as KJ is almost 4x the size of Can-One. If they borrow funds, they will be shouldering at least RM400m-500m to go through with the exercise, dangerous as the interest alone comes to RM30m-40m a year. Can-One also cannot issue shares to take over as that would dilute its own holdings enormously owing to the size of KJ. The best possibility is a merger but even then Can-One will need to shore up their balance sheet first, then a merger would be very likely event in the next few months.
Why Can-One's share price is worth at least RM2.20-2.40, and possibly RM2.80-3.00 if they follow the path mentioned in (g):
a) they have the single largest block and can trigger a G.O. at anytime
b) KJ's fundamentals and valuations is not terribly expensive (at 8x) which would make bankers comfortable to fund any G.O.
c) the court ruling is final, no more appeals, cannot go to Privy Council in London la ...
d) institutional funds would now be a lot more willing to get into Can-One and/or Kian Joo, esp the latter which has been tormented by family squabbles for the longest time
e) the flip side is that some of the See family still holding KJ shares may decide to launch their own G.O., which will need to be at least RM2.50 for it to be reasonable ... in any case, you can wrench the 32.9% stake from Can-One for the right price and Can-One would be sitting pretty with a very solid NTA per share
f) Can-One's NTA at RM1.348 would now balloon to RM1.65 just on the premium on the KJ's stake, which would serve to be a very base
g) Can-One can and should be considering a major corporate exercise soon: free warrants, with rights @ RM1.60 (NTA) and maybe even bonus or share splits because they have the business model to call for the rights, they may want to do a 1-for-1 @ RM1.60 coupled with a 1 for 2 free warrants. With the additional RM240m cash, they can whack off the loan to purchase the 32.9% KJ and also strengthen their balance sheet to ready for a complete G.O. for the remainder
h) the final reason why Can-One will NOT stay below RM2.00 for long is with the 32.9% stake in KJ, it elevates Can-One into a stock that is in play. Anyone who wants to take control of Can-One and Kian Joo can now just do a G.O. on Can-One. We all know how difficult it was to do any corporate M&A with Kian Joo in the past owing to the family squabble. By virtue of transforming Can-One into a dai-dee in a chor-dai-dee game, you have to accord a big premium on Can-One now.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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