Better performance in store - KULIM

by **Cals** Thu 15 Aug 2013, 09:22

Better performance in store
Business & Markets 2013
Written by RHB Research
Thursday, 15 August 2013 08:53

[b style="line-height: 18px;"]KULIM (M) BHD [][/b]
(Aug 14, RM3.62)
London-listed New Britain Palm Oil Ltd's (NPBO) profit before tax (PBT) for the second quarter of 2013 financial year (2QFY13) shot up 93.8% quarter-on-quarter (q-o-q) to US$9.3 million (RM30.4 million) as weather in Papua New Guinea had normalised in April.

In 1QFY13, NBPO's earnings were adversely affected by heavy rainfall. Given that NBPO makes up a significant proportion of Kulim (Malaysia) Bhd's earnings (28% in 1Q), the improvement in its 2Q earnings should see a corresponding surge in Kulim's 2Q earnings. We estimate Kulim's 2QFY13 PBT will rise to RM39 million from RM25 million for 1QFY13.

We also expect Kulim's PLANTATION []s in Malaysia to show further earnings improvement, with 2QFY13 fresh fruit bunch (FFB) production rising 12.4% q-o-q. Against the first half (1H) last year, Kulim's FFB production jumped 29.8% due to contribution from estates acquired from Johor Corp.

Recall that in 1QFY13, Kulim's Malaysia operations posted an 11.7% year-on-year increase in earnings before interest and tax (ebit), making it one of the few companies with strong earnings despite a 20% decline in crude palm oil (CPO) prices.

We expect this earnings momentum to continue. Our FY13 forecast earnings of RM156 million looks achievable despite the company having made only RM19 million in 1QFY13.

NBPO's board and independent advisers have advised shareholders to reject Kulim's offer to buy 30 million NBPO shares at £5.50 (RM27.47) each, as the offer price was deemed too low. The independent advisers value NBPO at £6.50 to £7.00 per share.

The acquisition, if successful, would be earnings accretive and boost our fair value for Kulim to RM3.80. However, all is not lost even if the takeover offer fails, as Kulim is NBPO's single largest shareholder and hence the biggest beneficiary if the latter is worth £6.50 to £7 a share.

Pricing NBPO at £7 implies that Kulim's Johor estates are valued at RM68,700 per ha, or 64 sen psf, which is cheap considering some of its estates are located on prime property development land. — RHB Research, Aug 14

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This article first appeared in The Edge Financial Daily, on August 15, 2013.