Kian Joo Can Factory - A favourable disposal

News   Kian Joo announced that it had signed an agreement in Vietnam last Friday to dispose its 60% stake in Kian Joo Canpack (Vietnam) Co. Ltd. (“KJCV”) to Nihon Canpack Co. Ltd. of Japan (“NCJ”) for a total cash consideration of USD9.3m or RM29.3m.

 KJCV is involved in the contract packaging of coffee, tea and fruits juices in Vietnam Binh Duong Province while NCJ is its joint-venture partner for the remaining 40% stake in KJCV.

 The disposal will be completed within one month andKian Joo will continue to supply cans to KJCV.

 KJCV will soon be renamed as Nihon Canpack Vietnam Co. Ltd. and will maintain its existing cooperation with Kian Joo.

 

Comments   We are not aware of any material impact to the company as the revenue contribution from contract packaging (6.1%) has been relatively small to Kian Joo in the past years as compared to the cans (71.3%) and corrugated carton (22.5%) divisions.

This is because the division has always been used merely as an added-value client servicing division  to introduce integrated business solutions to customers.

 We are overall positive on the disposal and reckon that the deal is favourable to Kian Joo. 

This is because Kian Joo has been able to sell at a premium price, with the sale price estimated to be at a historical PER of 62x. This estimate is based on the assumption that the whole FY11 contract packaging division’s PBT of RM0.6m was fully contributed by KJCV. Note that besides KJCV, Kian Joo also owns another two contract packaging companies that are based in Malaysia, although we assumed here that there are no significant profit contributions from these companies.

 Furthermore, the RM29.3m cash received will help trim Kian Joo’s net gearing ratio immediately from 0.11x to 0.07x upon the completion of the disposal.   

 

Outlook  The company has the ability to further improve its production operational efficiency to continue delivering organic growth as well as getting a potential boost from its expansion to the regional markets, which include its existing operations in Vietnam as well as the potential expansion of its aluminium can segment to Indonesia and Vietnam.

 

Forecast  There are no changes to our forecast.

 

Rating Maintain OUTPERFORM

 

Valuation   We are maintaining our TP of RM3.00 based on 9.5x PER (the 1 standard deviation above the average 5-year PER band) over FY13 EPS of 31.2 sen.

 

Risks  A price upswing in commodities will hit earnings.  

Source: Kenanga