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Monday, July 4, 2011

Kumpulan Fima (RM1.74; TP>RM2.00) - Merger between KFima and FimaCorp

TheEdgeWeekly just had an article on KFima and FimaCorp of which both of them could be merged under a single entity and could be somewhat similar to the merger between Sunway and Suncity OR it could be via privatization of FimaCorp. KFima is also cash rich with net cash of RM151.2 mil. If KFima is to take FimaCorp private, it has to fork out RM200 mil to take FimaCorp private and might need to borrow additional RM50 mil. TheEdge mentioned that it doesn't make sense for the exercise to be fully paid by cash. It's quite true in the sense that if fully paid by cash, KFima shareholders would benefit more than FimaCorp shareholders as KFima shareholders would stand to benefit from the additional earnings contributed by the extra 39% equity stake in FimaCorp while earnings from FimaCorp would not be diluted by extra share issuance. However, FimaCorp shareholders could not participate in the potential upside of KFima's share price. Perhaps a share swap would be more ideal as FimaCorp shareholders would stand to benefit from potential upside of merged entity's share price. A bumper dividend from FimaCorp could be ("Could be only :p") on the cards to sweeten the deal and could pump in cash from FimaCorp to KFima. Another thing, just to make things clearer as the article could be somewhat vague about the plantation hectarage, they would have a total of about 23,000 hectares of agricultural land (Oil palm and pineapple) if both entities are merged. Usual benefits of merger are economies of scale and elimination of inefficiencies etc etc. The merger would be good for the shares as well as FimaCorp shares are hardly traded, remains illiquid and trading at such low valuations, thus better to be taken off KLSE. On the other hand, KFima's or the merged entity's shares could have a larger share base to enhance liquidity when merged.

Major shareholders of KFima are buying KFima shares over the past few weeks. There should be some good deal in the offing for KFima. Valuation  remains very attractive as KFima is still trading at low PE of only 6.4x based on historical earnings while PBV is at about 1x. KFima share price has remained at this level for a very long time, thus it's about time to make a move. At this price, it's still good to go in. Dividend yield remains commendable at 4%.  It has strong balance sheet with net cash of RM151.2 mil coupled with cash cow businesses in  printing government security and confidential documents in addition to oil palm/pineapple plantations. 

Having said all these, the deal remains uncertain as there is no official announcement yet on KLSE. Nonetheless, based on its fundamentals alone, KFima is an attractive share to accumulate.  

PS: It just recently acquired an extra 5,000 hectares of plantation land in Sarawak. Thus, total plantation land is about 27,000 hectares, not 23,000 hectares as stated above. My apologies.

2 comments:

  1. Usually when two companies merger, both will benefit. Hence you may expect their share prices to improve once an official announcement is made.

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  2. Thanks a lot Ben Gan. I have the same thoughts :) Just that in this case I prefer KFima coz more liquid and lower price :)

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