Bjcorp ... Jul11

CIMB Research Report.

Investment highlights
• Banking on long-term prospects. B-Corp’s HK$3.5bn (RM1.3bn) proposal to take its 55.5%-owned Cosway private is pricey by Malaysian standards as it is paying HK$1.10 (RM0.42) cash per ordinary share and HK$1.10 per ICULS, which works out to 33x CY12 P/E, more than double Amway’s 15x CY12 consensus EPS. However, we note that Cosway has strong long-term prospects given its robust growth and scalable business. The privatisation could dilute FY12-14 EPS by 1- 7.3% but the impact is much lower in FY14 because of the anticipated strong growth of Cosway. We maintain our numbers pending completion of the deal but change our valuation method for Cosway from 8x P/E to marked-to-market. This increases
our SOP-based target price from RM1.38 to RM1.42 even though we raise our SOP discount from 30% to 45%. The stock remains a HOLD.

• Earnings dilutive. We forecast a 3-year net profit CAGR of 29% for Cosway, driven mainly by the opening of new “free stores”, intensified recruitment activities and the widening of its product portfolio. But the earnings impact of the higher stake will be more than offset by the cost of financing the acquisition. We estimate an additional RM78m interest expense p.a. assuming that it is 100% debt financed at 6.0% cost.
Assuming completion of the deal in 3QFY12, B-Corp’s FY12-14 EPS would be diluted by 1-7.3%. Note that the high dilution in FY12 relates partly to one-off privatisation expenses while the high dilution in FY13 is due to the full-year impact of the privatisation. Although short- to medium-term valuations are expensive, we
note that Cosway has strong long-term prospects given its robust growth and scalable business.

• Higher gearing is expected. As at April 2011, B-Corp’s net gearing stood at 0.44x. It will rise to 0.65x if the purchase is fully funded by borrowings. The interest cover for FY12 will drop from 3.6x to 3.3x.

Recent developments
Proposed privatisation of Cosway. B-Corp has proposed to take its 55.5%-owned subsidiary, Cosway Corporation Limited, private at a cash consideration of HK$1.10 (RM0.42) per ordinary share and HK$1.10 per HK$0.20 nominal amount of ICULS. The offer price of HK$1.10 represents a 45.1% premium over its 5-day volume weighted average market price. The proposed privatisation is subject to the approval of B-Corp’s shareholders as well as the relevant authorities in Hong Kong. As a result of the proposed privatisation, the proposed offer for sale of Cosway ICULS at RM0.09 apiece to B-Corp’s shareholders on the basis of one Cosway ICULS for every two BCorp shares is aborted.

Earnings outlook
Caught by surprise. The proposed privatisation came as a surprise as management had not indicated in the past any plans to take Cosway private. Based on the HK$1.10/share offer price, the privatisation exercise would cost B-Corp HK$2.3bn or RM882m for the shares that it does not own and HK$1.2bn or RM445m for the ICULS that it does not own. We think that the acquisition price or HK$3.5bn or RM1.3bn is
expensive by Malaysian standards as it values Cosway at 33x CY12 P/E, based on our forecast. This is more than double Amway Malaysia’s 15x CY12 consensus EPS.

However, we note that Cosway has a global reach whereas Amway Malaysia is restricted to the Malaysian market. We project an FY10-13 net profit CAGR of 29% for Cosway, driven mainly by the opening of new “free stores”, intensified recruitment activities and a wider product portfolio. “Free stores” are franchised stores where the franchisees place a deposit with Cosway, which, in turn, pays for all the capital expenditure and monthly costs.

Earnings dilutive. Assuming the privatisation is 100% debt-financed at 6.0% interest, B-Corp would incur an additional RM78m in interest expense per annum. This outweighs the additional income arising from a higher stake in Cosway. Assuming completion of the deal in 3QFY12, B-Corp’s FY12-14 EPS would be diluted by 1- 7.3%. Note that the high dilution in FY12 relates partly to one-off privatisation expenses while the high dilution in FY13 is due to the full-year impact of the privatisation. The dilution is much lower in FY14 because of the anticipated strong growth of Cosway. Although short- to medium-term valuations are expensive, we note that Cosway has strong long-term prospects given its robust growth and scalable business

Recommendation
Maintain HOLD while raising target price. Pending the completion of this deal, we make no changes to our EPS forecasts though we flag the potential dilution of 1-7.3% for FY12-14 EPS. In view of this proposed privatisation, we now change our valuation method for Cosway from 8x P/E to marked-to-market. This raises our SOP/share from RM1.97 to RM2.59. However, to factor in the higher gearing needed to take Cosway
private, we widen the discount to its SOP value from 30% to 45%. The net effect of these changes is a rise in our asset-based target price from RM1.38 to RM1.42. The stock remains a HOLD due to its volatile earnings record and potential delays in the development of Berjaya City or the Berjaya Hills landbank. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).