Kumpulan Perangsang Selangor (KPS) has entered into a conditional share sale agreement with AI Dream to divest a 50% equity interest in Kaiserkorp for RM265.5m. Kaiserkorp owns King Koil Licensing, the US-based owner of the King Koil mattress brand. The Group holds a 60% equity interest in Kaiserkorp via its wholly owned subsidiary, Bold Approach SB. We are neutral on this development as the divestment represents the Group’s commitment in streamlining its operations. The transaction will leave an earnings gap of c. 10% on average in our FY24-25 projections, after accounting for the remaining 10% profit share from Kaiserkorp coupled with the finance cost saving of RM9.6m per annum post divestment. All said, we deem the deal fairly valued, at 12.7x EV/EBITDA as the transaction represents a premium to the divestment price tag based on Kaiserkorp’s peers’ EV/EBITDA multiple of 11.9x (mean). Nonetheless, we make no adjustment to our earnings forecast pending the deal completion by 1QFY24. Our Neutral rating on KPS is affirmed with an unchanged TP of RM0.78 pegged at 0.35x PBV.

• Rationale of the divestment. The Group has been streamlining its operations since 4QFY22 via consolidation of its operations which involve plant closures as well as vertical acquisitions. Hence, we view this development a part of its initiative to further streamline its operations whilst benefitting from its remaining 10% stake in Kaiserkorp. The Group did not indicate its intention for another acquisition in the near term.

• Special dividend. Upon completion of the deal, KPS will become a relatively cash rich company. Based on the Group’s 3QFY23 numbers, cash in hand stood at RM467.5m while total debt was about RM447.5m. The Group’s cash pile would increase by more than 50% to RM733m after accounting for the gross proceeds from the divestment. From the announcement, KPS has indicated a special dividend of 4.5sen per share, on top of the 30% annual dividend payout of c. 1.4sen/share in FY24.

• Valuation and earnings impact. We deem the deal fairly valued, at 12.7x EV/EBITDA as the transaction represents a premium to the divestment price tag based on Kaiserkorp’s peers’ EV/EBITDA multiple of 11.9x (mean). On earnings post divestment, the 50% stake disposal would render an earnings gap of c. 10% in FY24-25. Management has highlighted that the divestment represents an opportune time for the Group to monetise Kaiserkorp – the deal is expected to yield a net gain of RM117.4m. Recall, KPS acquired Kaiserkorp’s 60% stake for RM116.7m in May 2016.

Source: PublicInvest Research - 10 Jan 2024