Can-One Bhd
(Sept 15, RM1.05)
Maintain neutral at RM1.09 with target price of RM1.10: We reiterate “neutral” with our target price of RM1.10 derived based on FY2011’s EPS of 15.6 sen and PER of seven times based on a discount of two times vis-à-vis its peers Johore Tin & Kian Joo Can Factory (KJCF). The merits of Can-One are: (i) jerry can leader in terms of production facilities in Malaysia; (ii) potential revenue boost from its sweetened condensed milk (SCM) and evaporated milk (EVM) market; (iii) potential synergistic effect if its proposed acquisition KJCF is successful; and (iv) tin can division which complements its liquid milk division (15% of tin can sales go towards its liquid milk division).
Can-One is involved in basically two business divisions — the general can division (tin cans and jerry cans) and liquid milk (SCM and EM). At the moment, it holds a 23% share of the tin can market and the lion’s share at 70% of the edible oil tin can segment. Its food product segments currently produce both SCM (three lines) and EV (one line). The EV line was introduced in 4QFY2009.
The absence of a considerable contract compared with 1HFY2009 saw 1HFY2010 revenue return to its normal level of RM201 million, while profits reduced owing to higher raw material costs as the spot price for tin hovered around US$20,000/mt to US$21,000/mt on the London Metal Exchange. The HDPE spot price for Southeast Asia was around US$900/mt to US$1,200/mt. Ebit margin is expected to increase in the 2HFY2010 due to the pass-on effect from the higher raw material cost.
Can-One’s liquid milk production saw better demand, with revenue in 2QFY2010 surging by 60.2% year-on-year to RM46.3 million (2QFY2009: RM28.9 million). Its dairy arm accounts for 39.1% (YTD2010) of the total revenue compared to 31% in FY2009 benefitting from higher exports to South Africa in view of the 2010 Fifa World Cup. Operating at 85% of full capacity, with 70% of its products exported to Africa and the Middle East, Can-One plans to roll out additional lines (+1SCM, +2EVM) by end-FY2010 to cater for potential demand.
Margins are sensitive to raw material prices which account for 70% to 75% of the cost of production for tin cans (tin plates purchased from Perstima) and jerry cans (high density polythylene, HEPD); while raw materials make up 85% of the cost of their dairy products (skim milk powder, whey, oil palm). Nonetheless, they are able to pass down any price hikes to their customers.
The court hearing on Can-One’s proposed acquisition of KJCF remains unresolved, implying that any setback or resistance by KJCF’s management or potential synergies with Can-One remain hazy. Should the proposed acquisition materialise, Can-One’s gearing of 1.2 times might increase to approximately 2.3 times, assuming it embarks on an all-debt financing route. Its borrowings at the moment stand at RM99.6 million working capital, RM96 million for expansionary items (machinery and additional lines) and RM29 million for the proposed KJCF proposed acquisition. — Inter-Pacific Research Sdn Bhd, Sept 15
This article appeared in The Edge Financial Daily, September 17, 2010.
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