Selling Pressure Continues

Major shareholder continues to offload shares in Kian Joo

Latest Development

Malaysian’s pension fund, EPF continues to offload its equity position in Bursa-listed packaging company, Kian Joo Can Factory Berhad (“KJ”). Summary of recent Bursa announcements relating to the on-going disposals is shown as follows:

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Technically, KJ continues to remain “bearish” in the short term:

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Price Earnings Ratio (“PER”) as Valuation Metric

Does the fundamental angle support a higher valuation for KJ? The historical trailing price-to-earnings ratios (“PER”) of KJ is between 6.34 times and 14.06 times, with an average of 10.31 times (since Jan 2011):

KJ_PE Grpah.png

So, what is a fair PER? One may possibly consider the following formula:

Fair PER = (ROE – g) / ROE (r-g), whereby ROE = Return of Equity, g = earnings growth rate and r = required rate of return

Financial Highlights

Historically, KJ has a stable financial profile, recording year-on-year revenue growth rate with a 10 year simple average of 9.3% growth rate per annum. Except for the latest financial period ending 30 June 16, KJ records relatively stable year-on-year annual earnings growth rate, with respectable 10-year average return on equity (“ROE”) of 10.2%. The latest financial period of KJ was impacted by volatility in the exchange rate as well as competition in the packaging industry.

KL Financials.pngPER Simulations & Indicative Valuation Range

To derive a fair PER for KJ, we have run numerous simulations of PER based on the following key parameters:

  1. Discount rate 7.0% – 10.0% (as per CAPM rule shown below, we have derived cost of equity of 6.65% for KJ)
  2. Perpetual earnings growth rate: (3.0%) – 3.0% (not unreasonable in view of the actual long term average year-on-year earnings growth rate of KJ )
  3. ROE 5.50% – 12.0% (not unreasonable in view of actual long term average ROE for KJ)

78 discount rate910 discount rateBased on the above simulations, we limit our valuation analysis based on ROE of between 9.50% and 10.50% and perpetual annual earnings growth rate of between 1.5% and 2.0%. Scenario (based on discount rate of 7.0%, ROE:9.50%-10.50%, g=1.5%-2.0%) has been excluded as well, as the derived PER is relatively higher than of the actual trading PER range of KJ of not higher than 14.06 times.

Therefore, based on PER of of between 9.91 times to 13.49 times and forecast FY16 EPS of 23.12 sen, the indicative valuation range of KJ is between RM2.29 and RM3.12 per share.

ValuationRange.pngKindly note that the above analysis is a simple desktop analysis. Detailed analysis is required to ascertain the valuation range of KJ.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Is the selling finally over?

Malaysia’s Employees Provident Fund (“EPF”) has been offloading its position in Kian Joo Can Factory Berhad (“Kian Joo”) ever since the recent termination of the proposed take-over exercise of Kian Joo, as summarised below:

KJCF_Insiders2.png

As shown in the graph below, recent price and volume trends appear to suggest that the overselling has moderated, with a lower trading volume being recorded in the month of June 2016.

KianJoo_6 June 2016.pngIt is also observed that the current closing price has touched above the 10D moving average price of Kian Joo, indicating a potential upward movement. There is a possibility that the 10D MA may cross above the 20D MA. Further, a gradual increasing RSI trend also supports a more stabilising price trend for Kian Joo.

Further positive catalysts (e.g earnings growth) are required to support a strong upward movement for Kian Joo.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

No Deal, What Is Next?

Company Updates – Kian Joo Can Factory Berhad (“KJCF”)

The proposed RM1.47bil sale of Kian Joo Can Factory Bhd’s entire business and undertaking to Aspire insight Sdn Bhd, a company partly owned by tne Employees Provident Fund Board (EPF), has been called off.

This also means that the proposed cash distribution of at least RM3.30 per share to Kian Joo shareholders is off, as returning the cash proceeds to them is conditional on the proposed disposal being completed.

There was a much-publicised but unsuccessful court battle to block Aspire Insight’s takeover of tin can and cardboard carton maker Kian Joo. The length of the court battle may have helped to derail the plan, but the final deal-breaker is a disagreement over the sale’s price tag.

In a statement to Bursa Malaysia on Friday, Kian Joo said it and Aspire had mutually agreed to terminate the business sale agreement (BSA) signed in March 2014 and its ancillary agreements.

http://www.thestar.com.my/business/business-news/2016/04/16/kian-joo-and-aspire-call-off-takeover/

Company website sourcelink: http://www.kianjoocan.com.my/

Technically Speaking

The calling off of the takeover exercise has finally removed the overhang over KJCF’s share price. Upon the announcement, its share price has shot up to as high as RM3.38.

KJCB_TA

As of 11 May 2016, KJCF closed at RM3.15 which is considered as “oversold” (from Win%R and RSI indicators) and further, it traded close to the support area of RM3.10. With a “Hammer” candlestick and 50D moving average crossing over the 200D, there is a potential rebound opportunity. Resistance is expected at RM3.44, which may be potentially considered as immediate target price.

Share price has been falling lately partly, attributable to the recent disposals by EPF. However, the existing substantial shareholder, Dato See has been supporting the company as shown below:

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Fundamentally Speaking

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Based on a simple desktop analysis, current indicative equity valuation of KJCF is about RM3.50 per share, which represents approximately 10%+ premium to its current price of RM3.15. Based on assumed 12% annual growth rate in share price, KJCF is forecasted to reach RM3.92 by end of 2016.

Analysts’ Price Target

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Concluding Remarks

Short term rebound opportunity, with support at RM3.10 and resistance at RM3.44. Supported by good business fundamentals and higher analysts’ target price. There was also a competing offer earlier, at RM3.74 per share for KJCF. (http://www.thestar.com.my/business/business-news/2014/03/12/spotlight-on-epf-toyota-tsusho-offer-will-be-good-opportunity-for-fund-to-cash-out/).There may be potential concerns in view of the on-going tussles between See Family and Management of KJCF. 

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.