What JCorp gets out of privatising Kulim

by **Cals** Sun 15 Nov 2015, 02:31

Saturday, 14 November 2015

What JCorp gets out of privatising Kulim

BY AFIQ ISA

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Vast landbank: A Kulim oil palm estate. With JCorp privatising Kulim, there will be 46,000 hectares of oil palm land in Johor coming back to JCorp. Hence a revaluation of the land assets of JCorp could bring a windfall to the group.

Among others, lots of cash and a vast landbank
Johor Corp Bhd’s (JCorp) proposal to take its 62%-owned subsidiary Kulim (M) Bhd private is said to be attractive for minority shareholders, given the high offer price of RM4.10 per share.
On the other hand, the state investment fund will come out as the clear winner by securing Kulim’s cash pile and vast palm oil landbank.
Kulim’s debt load, and by extension JCorp’s, was considerably lightened following the sale of New Britain Palm Oil Ltd (NBPOL), which previously held some RM2bil worth of liabilities.
Following the stake sale, Kulim’s clean balance sheet and cash rich position makes it an attractive takeover target for its parent.
On Nov 5, JCorp announced a proposed selective capital reduction (SCR) and repayment exercise to take over Kulim
At RM4.10 per share, it will cost some RM2.2bil to acquire the 540.85 million Kulim shares held by entitled minority shareholders, which forms 38.13% of Kulim’s share base. The shares will subsequently be cancelled as part of the deal.
“We believe the privatisation attempt is likely to be successful given the generous price offered which is 24% above the stock’s closing price prior to the announcement,” said RHB Research analyst Alvin Tai in a Nov 6 note.
While there are potential value boosters for Kulim going forward, such as its new oil and gas venture and the improvement in its overall palm oil yields, these catalysts are unlikely to push up the stock price to RM4.10 in the next 12 months, adds RHB.
JCorp has cited the current challenges in the palm oil and oil and gas sectors as its rationale for taking Kulim private.
“Given the challenging market environment and lack of immediate re-rating catalysts, the proposed SCR represents a good opportunity for minority shareholders to realise cash for their investments at an attractive premium above prevailing market prices for Kulim’s shares,” said JCorp in its offer letter.
By undertaking a selective capital reduction, the offerors are essentially financing the privatisation partly with the takeover target’s own funds.
The takeover may be funded by an advance from the offeror or by Kulim taking up a loan, or a combination of both, according to JCorp’s announcement.
The implication is that Kulim’s current cash pile of RM1.74bil will be largely intact as any debt incurred from financing the takeover would be serviced for the longer term.
After netting off the costs incurred from paying off minority shareholders, JCorp will be able to access the cash pile while at the same time undertake a restructuring of Kulim’s assets.
It is worth noting that asset-rich but debt-laden JCorp is still working on restructuring its books after four years.
As at Dec 31, 2014, JCorp had RM5.95bil in total loans and borrowings.
According to its 2014 annual report, JCorp has some RM3.62bil worth of loans and borrowings that will reach maturity between now and the year 2022.
This explains JCorp’s desire to grow its current cash base in order to meet repayment obligations.
As at Dec 31, 2014, it had RM1.09bil in cash and bank balances out of RM20.4bil in total assets.
JCorp also received some RM300mil in dividends from Kulim’s earlier special dividend of 37.65 sen in March this year.
JCorp also managed to raise a further RM252mil from the listing of Al-Salam REIT on Sept 29.
The group had encountered cash flow issues in the past.
It was reported that in 2012, the federal government agreed to guarantee JCorp’s debt refinancing exercise via a sukuk issuance in order to redeem RM3.2bil in outstanding bonds that were maturing in July that year.
As for Kulim’s land assets, note that JCorp had sold a chunk of its palm oil land to Kulim back in August 2012 for RM700mil as part of JCorp’s fundraising exercise at the time.
But now with JCorp privatising Kulim, there will be 46,000 hectares of palm oil land in Johor coming back to JCorp.
Hence a revaluation of the land assets of JCorp could bring a windfall to the group.
For example, Kulim’s Labis Bahru and Basir Ismail estates totalled some 4984 hectares and carry a combined net book value of RM476.28mil.
However, both were last revalued in 1997.
Given the pricey deals for palm oil land in Malaysia in recent years, Kulim’s existing landbank could be worth a fortune to JCorp.
In July 2013, Felda Global Ventures Holdings Bhd (FGV) bought out Pontian United Plantations in a RM1.21bil deal. Pontian’s brownfield estates are located in Sabah and Johor.
Based on FGV’s purchase price, the value of Pontian’s 12,669 ha in landbank translated to approximately RM74,800 per ha.
Going forward, what JCorp intends to do with Kulim’s assets is unclear.
The matter would certainly be raised by shareholders in an upcoming extraordinary general meeting (EGM) by Kulim to vote on the deal.
Kulim’s board of directors have until Nov 20 to approve JCorp’s proposal at its present terms.