Kian Joo Can Factory - Hitting the right notes

Kian Joo remains in the limelight after the entry of two new directors from Can-One on its board recently, a move which we believe could spark a new fresh outlook and add strength to the direction of the company. The stock has surged 22.86%, outperforming the FBMKLCI by >20% since we selected it as our Top Pick for our 3Q12 Investment Strategy on 25 June 2012. We reiterate our bullish outlook on the stock even after the recent run-up. While we are maintaining our earnings forecast with growth rates of 16%-14% for FY12-13E, we are upgrading our TP on Kian Joo to RM3.00 (from RM2.50 previously) based on 9.5x PER of FY13E EPS of 31.2sen. This valuation is at a 1 SD above its 5-year average PER of 8.0x, which was our previous targeted PER. The higher PER target is inline with the recent stock re-rating on the back of increasing interest in the company. Apart from strong fundamentals and regional expansion plans, the high dividend yields will continue to limit any downside risks to the stock.

Interest picking up. Kian Joo’s share price has ran up from RM1.89 after we upgraded our call to an OUTPERFORM on 18 May 2012, validating our conviction on the company. That said, we note that interest in the stock has continued to increase, which we reckon could be likely due to renewed optimism on the company now that its shareholders’ tussle in court has effectively ended with Can-One being the controlling shareholder now. Volume for the first week of July alone was already more than the last 5- month average volume and also one-half the highest monthly volume done in the past one year (in Apr 2011). Rising interest (read liquidity) together with the company’s strong fundamentals means the stock is potentially ripe for a re-rating upwards as its risk premium dissipates from the ending of the tussle. We see the PER valuation on the stock being re-rated to 9.5x (from 8.0x), lifting our new TP to RM3.00 (from 2.50 previously, see also overleaf for further details).

Business as usual. In our view, the change in the substantial shareholder (where the 32.9%-stake in Kian Joo was acquired by Can-One from Kian Joo Holdings in Jan 2012), will not have any material impact to the company’s existing operations even though there could be some potential changes in the management. For one, we believe that Can-One is likely to make sure that any changes will not affect the profitability of Kian Joo since its profits are equity accounted to Can-One’s earnings. Secondly, Can-One also needs the dividends from Kian Joo to pay for its interest on the borrowings it took to buy the stake and at 1.4x gearing, the company is not likely to rock the boat at Kian Joo’s operation thus. A likely scenario is Can-One overlooking the interest of its stake with one or two senior management appointments while leaving the day-to-day operations in the hands of the existing proven and experienced Kian Joo management. Hence, things should be business as usual at Kian Joo, with the company likely to continue pursuing its regional expansion of its aluminium can business to Indonesia and Vietnam (See overleaf for more details).

Higher dividend yield than the market. Kian Joo has consistently distributed about 50% payout of its net earnings every year as dividends in the past five years except for 2008 (when it only paid out 40%). Going forward, we are expecting a similar payout ratio with 13.7 sen and 15.6 sen dividends forecast for FY12-13. These translate into attractive net dividend yields of 5.6%-6.3%. We thus believe that any downside to the stock would be limited as the yields above are much higher than the average net dividend yield for FBMKLCI and KL Consumer Index of 2.8%.

Source: Kenanga