Can-One From The Wilderness To The Top Of The Pack ... Sometimes Money Just Want To Flow To Your Side

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
		30/09/2011	30/09/2010	30/09/2011	30/09/2010
		$$'000	$$'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.

Seeing The Heap Of Rubble From More Angles

Mr. Koon Yew Yin has sent me this insightful, simple yet clear article by an Indian economist (I think, or a potential American bank CEO anyway). Much of what he has written is true but there are a few things we should add. My comments in bold and parentheses.

The Japanese save a lot. They do not spend much. Also Japan exports far more than it imports. Has an annual trade surplus of over $100 billion, yet  Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US import  more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.

 (Well, the US economy is not strong at all. While we have been fixated at the federal budget deficit, there are much larger holes to think of. One is total obligations over the coming 10-20 years, much of it in interest and paying for medicare and pensions. Two, that is at the federal level, almost every single state in the US is already way deep in deficit, i.e. tax revenues cannot cover normal budget requirements and committments / liabilities / claims from their residents.


What are strong: US corporations that have invested well overseas; US education system that still attracts the best and hence having cherry pickings of the top brains; US lead in research, development and innovation, you can't buy that culture of innovation; all that may have a lot to do with having critical mass in population and transparency in rewarding efforts and innovation; and the immense movement, raising and deployment of capital for investing - more than adequate capital searching for great ideas, and good businesses finding critical mass for their products and services with immediacy.)



 But where from do Americans get money to spend?

 

They borrow from Japan, China and even India. Virtually others save for the US to spend. Global savings are mostly invested in US, in dollars. India itself keeps its foreign currency assets of over $50 billions in US securities. China has sunk over $160 billion in US securities. Japan's stakes in US securities is in trillions.

Result:

The US has taken over $5 trillion from the world. So, as the world saves for the US, Americans spend freely.

Today, to keep the US consumption going, that is for the US economy to work, the countries have to remit $180 billion every quarter that is $2 billion a day to the US! Otherwise the US economy would go sick.So will the global economy.

The result will be no different if US consumers begin consuming less. A Chinese economist asked a neat question.

Who has invested more, US in China or China in US?

The US has invested in China less than half of what China has invested in US. The same is the case with India. We have invested in US over $50 billion. But the US has invested less than $20 billion in India.

(To be entirely fair, much of why the US have accumulated so much debt and trade deficit is because of the deliberate and purposeful under-valuation of emerging markets currencies. You make your own currency weak to boost your competitiveness and export marketability, and then you fucking turn around and scold the very people that bought your highly competitive goods? All the while, enjoying higher employment and growth for your own domestic economy. If the US had taken a much stringer line on currency valuation disparity, growth in China, India and other emerging markets may not have been as solid - then we fuckers would have been scolding the US for suppressing the emerging markets from joining the global economy!

But of course the US has to shoulder some of the blame as well. Is it the lack of savings or over consumption? Its neither really, the root of the problem is the existence of substantive safety nets - subsidised medical care; good pension schemes; the separation of parents-children support network when the latter reaches adulthood; etc. When a society has strong safety nets, there will be a direct causation to less savings. Emerging markets population naturally save more as we have to take care of ourselves all the way, plus your immediate family's lifelong welfare.)

 
Why the world is after US?

The secret lies in the American spending, that they hardly save. In fact they use their credit cards to spend their future income. That the US spends is what makes it attractive to export to the US. So US imports more than what it exports year after year.

The Result:

The world is dependent on US consumption for its growth. By its deepening culture of consumption, the US has habituated the world to feed on US consumption. But as the US needs money to finance its consumption, the world provides the money.

It's like a shopkeeper providing the money to a customer so that the customer keeps buying from his shop. The customer will not buy; the shop won't have business, unless the shopkeeper funds him.

The US is like the lucky customer. And the world is like the helpless shopkeeper financier.

Who is America 's biggest shopkeeper financer? Japan of course.

Yet it's Japan which is regarded as weak. Modern economists complain that Japanese do not spend, so they do not Grow. To force the Japanese to spend, the Japanese government exerted itself. Reduced the savings rates, even charged the savers Even then the Japanese did not spend (habits don't change, even with taxes, do they?).

Their traditional postal savings alone is over $1.2 trillions, about three times the Indian GDP. Thus, savings, far from being the strength of Japan , has become its pain.

Hence, what is the lesson?

A nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend.

Dr. Jagdish Bhagwati, the famous Indian-born economist in the US , told that don't wastefully save.

Start spending, on imported cars and, seriously, even on cosmetics! This will put all nations on a growth curve.

'Saving is sin, and spending is virtue.'

Before you follow this neo economics, get some fools to save so that you can borrow from them and spend.

This is what US has successfully done in last few decades.

Written by Dr Jagdish Bhagwati, an economist.

(While much has been written about the US flagrancy for financial discipline and excessive addiction to debt, we need to look at the issues from more angles. We have to remember that a substantial portion of their debt stems from funding their military strength. Is that for the US alone? As the policeman and guardian of the virtues of democracy and sanctity of human rights in down-trodden countries with cruel regimes, we have no one else to do that. Yes, the US may not be doing that for pure altruistic reasons, but what if the US just cuts back 90% of their military spending to manage their long term deficits better - can you imagine the pockets of anarchy and the trampling on human rights all over the world.

To think of it in another way, if the US were to farm out their military spending as a "cost subsidy to all emerging markets", do you think the emerging markets can afford to pay for that "protection". Don't even think of saying you don't need protection, we are all enjoying the protection already in some major way or form. Think of China extending their might towards the rest of Asia, or inflict greater incursions into Taiwan. Think of the havoc propagated by the Islamic fanatics left unchecked. Think of Indonesia deciding to capture Malaysia and Singapore, just because they can. ) 

Learning From Genting's Excellent Strategy

First and foremost, I am not a big fan of Genting Group, in particular, I think its corporate governance and transparency should be a lot better. The top compensation packages for certain people are too outrageous for my cup of tea. Its akin to running it like a family owned unit rather than a publicly listed concern.

That aside, when they do something well, we should applaud and try to learn from it. It was a far fetched idea when Genting was bidding for one of the IR slots. Surely they were in stiff competition where global operators with "more experience" in transplanting a lavish IR were around.

The other thing that I counted against Genting was their tacky taste in design and fit outs. I mean, look at Genting Highlands. Even the new resort at Sentosa has some "cringe worthy" design flaws. Call it taste, class or ambiance, either you have it or you don't. You may be able to buy the most expensive design brains, but when top management has the right to overrule and make changes, you get the watered down version.

To succeed where others failed. In hindsight, this is the key to winning the Sentosa IR bid. Track onto what the client really wants, tap their insecurities, concerns and expectations. The thing is, most clients will NEVER tell you their real insecurities and underlying expectations - which inevitably will be what they finally base their decision making process on, but most of the times are never enunciated. Instead of just presenting what you think is a lavish, mega entertainment, modern, high-tech concept ... did anyone really address Singapore's insecurities, concerns and expectations?



How did Genting do it? They had one advantage, being close neighbours, we all understood how Singapore think and operate. Kiasu and kiasi, though often bandied around as jokes, have more truth in them than meet the eyes.

Their main concerns: must more than match the glitz of Macau, complete with being a super entertainment and shopping mecca for MICE as well. That was accomplished with Sands. You don't need two of that, hence the Sentosa IR has to be different than the one in the city.

Singapore concern is not Las Vegas, Australia or Monaco ... its Macau/HK. The Sentosa IR was an opportunity to match or take a large stride to overhaul HK, or improve on what HK offers. HK has Disneyland, so Universal Studios is a good match. The fact that Disneyland has an on/off ploy to operate in Iskandar only played into Genting's understanding of Singapore's concerns. You don't need another Disneyland, so close to HK's. It has to be different.

The other thing was Ocean Park in HK. Walla ... Ocean Park being pretty dated now would now be usurped by Sentosa's "world's largest oceanarium".



The third concern would have been the casino in Genting Highlands. You want outright cannibalism with the IRs or someone who will work harder to make the IR a success even though there is another casino a few hours away. Better to work with the "enemy" than to fight them tooth and nail.

Developer Resorts World Sentosa said it will open the "world's largest oceanarium" in the middle of next year, which is expected to lure tourists away from the venerable Ocean Park. After taking on Hong Kong Disneyland with Universal Studios Singapore, the Lion City is set to unveil a rival to Ocean Park.

Marine Life Park, an eight-hectare home to 700,000 fish inside a 30-million-liter lagoon, is on track for Sentosa's phase two expansion, which also includes a maritime museum, an aquarium and two hotels. Ocean Park covers 87 hectares but its Grand Aquarium contains only 5,000 fish of more over 400 species. The new marine park was revealed at Friday's grand opening of Universal Studios Singapore, one of the resort's anchor attractions on an island off the southern coast.

Its official opening came nine months after its soft launch and was attended by former American Idol judge and now X Factor USA judge Paula Abdul and iconic Hong Kong actress Maggie Cheung Man-yuk.

"The advantage we probably have here is that the Universal Studios is in the same resort as the Marine Life Park," said Sentosa executive chairman Lim Kok Thay. "When compared with Hong Kong, we actually have two in one [attractions]."

He admits that Marine Life Park "shares a lot of similarities in concept" with its competitor in Hong Kong, adding the resort learned a lot from the Ocean Park group in particular. It is in the same HK$41 billion integrated resort with the movie theme park and a casino, which was developed by Genting Singapore.

The city-state's concentrated effort to lure tourists away from neighboring travel destinations such as Hong Kong has been paying off. Last year, it welcomed a record 12 million visitors, a year- on-year rise of around 25 percent. Since March, Universal Studios Singapore has attracted about two million visitors, of whom 75 percent are foreigners.

The 20-hectare theme park now has 21 rides and shows in seven themed zones, the newest a river boat ride. It launched the world's tallest dueling roller coasters, Battlestar Galactica, in February. Universal Studios Singapore, the second of its kind in Asia after the one in Japan, covers an area of 25 football fields - smaller than Ocean Park and the world's smallest Disneyland in Hong Kong.

Ocean Park welcomed the marine park, saying it would generate competition and attract more tourists to Asia.

The $1 Billion Mark - A Most Important Posting

You probably have to pay money to get this tip, but its all part of sharing. What is the $1b mark? Its a very critical level for emerging market stocks. You will find that the companies going for international roadshows all fall over that mark.



You would have made good money in Indonesia last year if you focused on stocks hovering just below the $1bn mark. That is a critical level as plenty of emerging market funds or listed funds or ETFs have it written that they cannot invest in stocks that have a market cap of less than $1bn.

I know it, the fund managers know it, and seriously, plenty of CEOs know that as well. If you are too far off the mark, no point trying to get there. If you check with international brokers over the last few weeks as to their flow of orders. You will find a significant flow into stocks which are hovering close to the $1bn mark. There are always vultures around, especially smaller funds or hedge funds which do not have those kind of restrictions.

Once that level is breached you will find it attracting a lot of new international investors. Thus it was often that plenty who breached it, moved pretty swiftly to $1.5bn market cap.

Valuation aside, what is premium valuation compared to the usual under valuation of good stocks? Its not that they are not good enough, they are just not big enough for the funds to plough their funds into. They really like some of the smaller stocks but just shrug their shoulders.



What constitutes premium valuation, being investable by large foreign funds would bring about that premium for sure. Consistency in delivery and execution would count as well.

Is it a coincidence that recent strong run ups were seen in the following stocks, note their market cap NOW in brackets:

Hap Seng (RM4bn)
DRB Hicom (RM3.3bn)
Tan Chong (RM3.3bn)
Dialog (RM4.1bn)
Kencana (RM4.2bn)
Sapuracrest (RM4.6bn)
Boustead (RM5.1bn)

You would also have noted that its the recent run up which has pushed them past the $1bn mark. As mentioned before, we can be sure that there were vultures when they were hovering around $800m-900m. Coincidence?

If you were to consider the present landscape, Mah Sing has attracted a lot of vultures as its market cap stands at just over RM2bn. Is it a bit early? Probably not because if you look at their projected EPS growth and PBT this year and next, its sustainable to move to RM3.50, by which then its market cap will be RM2.6bn. For them, its necessary to move the share to RM4.00, hopefully supported by more aggressive land banking or by securing some new influential and value-add jv by issuing new shares, now, that would propel them to the "investable range".

The same strategy looks to be in place for YTL Land, its market cap now stands at nearly RM1.7bn. I think Francis Yeoh is smart enough to know about the $1bn mark having been around those circles for so long. Thats probably why the upcoming asset injections would easily push the stock past the RM3bn mark. Look for a long sustained run in both counters.