Berjaya Corporation Berhad Update - Expanding portfolio

By CIMB Research Report
7 May 2012


Investment highlights 
Buying stake in Atlan. B-Corp may end up with a 25% stake in Bursa-listed Atlan Holdings after offering to buy an additional 15.8% stake. The RM4.25 offer price for the duty-free operator is, in our view, fair as it values it at 9.4x FY12 P/E, lower than its 5-year historical average of 15x. We are overall neutral on this surprising deal as the impact on the bottomline is minimal. Our target price is cut from RM0.98 to RM0.89 as we have widened our SOP discount from 50% to 55% to factor in election risks, particularly for the gaming operations. The stock remains a Hold as it is unlikely to outperform in such an environment. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
Earnings accretive. Although our net profit forecasts could rise by 9-12%, the impact on our FY12-14 FD EPS forecasts is only 3.5-6.4% due to the enlarged share base as the RM170m payment for the second tranche will be via 5% ICULS with warrants (it paid RM85m cash for the first tranche). The contribution from Atlan could be partly used to offset the ICULS interest which amounts to RM8.5m per annum. In our computations, we assumed 5% growth for Atlan for FY12-14 but excluded FY12’s RM57m one-off items.
Cutting target price. Although we maintain our numbers pending completion of the deal, our target price is cut from RM0.98 to RM0.89 as we have widened our SOP discount from 50% to 55% to factor in election risks, particularly for the gaming operations. On completion of the acquisition, our target price could be further reduced to RM0.85 to reflect the higher share base.


Earnings outlook 
Caught by surprise. The proposal caught us by a surprise even though we see
potential for synergies between the two companies as Atlan is, like B-Corp, involved in
property and leisure, in addition to its duty-free  operations. Apart from the RM85m
paid for the 7.9% Atlan shares, B-Corp will issue RM170m irredeemable convertible
unsecured loan stocks (ICULS) together with 170m detachable warrants as payment
for another 40m shares, valuing Atlan at RM4.25 per share.  We think that the
acquisition price is fair as it values Atlan at 9.4x FY2/12 P/E, lower than its 5-year
historical average P/E of 15x.
Background on Atlan. Atlan Holdings, which is listed on the Main Market of Bursa
Securities, is involved in duty-free trading and retailing, property development and
investment, hospitality as well as manufacturing of automotive component parts. It
holds 81% of Duty Free International Limited. It also manages the Zon Johor Bahru
Duty Free Complex, the Zon Regency Hotel by the sea in Johor Bahru and the
international ferry terminal at Johor Bahru duty-free zone. It operates a golf club, Black
Forest Golf & Country Club, which is located near the Malaysia-Thailand border at
Bukit Kayu Hitam, Kedah.
Earnings accretive. Although our net profit forecasts could rise by 9-12%, our FY12-
14 FD EPS forecasts rise by only 3.5-6.4% due to the enlarged share base. Note that
we have assumed 5% growth for Atlan for FY12-14 and excluded RM57m one-offs
(mainly gain on disposal of land and reorganisation cost). The contribution from Atlan
could be partly used to offset the ICULS interest which amounts to RM8.5m per
annum.
Gearing to rise. As at Jan 2012, B-Corp’s net gearing stood at 0.44x. It will rise to
0.47x after this acquisition.


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