PETALING JAYA: CCK Consolidated Holdings Bhd’s proposed acquisition of a prawn processing business in Indonesia will bring business synergies and contribute to profitability.

       However, CGS-CIMB Research is “neutral” on the deal due to concerns over the volatile nature of the business and it being a related party transaction (RPT).

       Last week, CCK proposed to buy PT Bonanza Pratama Abadi, an Indonesian company involved in shrimp processing for US$8mil or RM33.8mil.

       The acquisition is deemed a related party transaction as both CCK and PT Bonanza have common major shareholders.

       “Overall, we are ‘neutral’ on the proposed acquisition based on the initial announcement details.

       “On the positive side, we believe that the acquisition can be earnings accretive while we are aware of the synergies between PT Bonanza and CCK.

       “On the flip side, we are concerned about the earnings volatility of PT Bonanza’s business and the fact that it is a RPT,” CGS-CIMB said in a note to clients.

       The research firm added that it gathered the purchase was done on a “willing buyer, willing seller” basis.

       CCK has operations in Indonesia, which contributed 20% of its financial year 2021 (FY21) revenue. It also has a prawn segment for the rearing and production of prawn and seafood products in Malaysia, which made up 3.3% of FY21 revenue.

       Based on the RM33.8mil purchase price, this valued PT Bonanza at 8.7 times 2020 price to earnings (PE). In comparison, regional peers with similar business are trading at 7.2 times to 11.9 times PE.

       “CCK aims to fund this acquisition via internally generated funds and bank borrowings, which should not be an issue given its current net gearing of 0.05 times as of end-FY21,” said CGS-CIMB Research.

       It added that assuming PT Bonanza could achieve similar net profit as it did in FY20, this could lift CCK’s FY22-FY24 forecast earnings per share (EPS) by 5.6% to 10.2%.

       The company derived 80% of its sales from exports to Japan and made a net profit of RM3.9mil in FY20.

       “Nevertheless, we make no changes to our FY22-24 forecast EPS estimates pending further operational details such as capacity and selling prices, as well as CCK obtaining approval from an EGM,” said the research firm.

       It kept its “add” call and target price of 76 sen. Current valuations are attractive at 9.7 times 2023 forecast PE, which is a 25.4% discount to its five-year mean, it added.

       Subject to CCK obtaining all relevant approvals and shareholders’ nod at an EGM, the proposed acquisition is targeted to be completed in the second half of 2022.