- We are downgrading Kulim from HOLD to SELL with an unchanged fair value of RM3.50/share. Kulim is currently trading at a demanding FY14F fully diluted PE of 24.6x.

- Kulim’s net profit included forex losses of RM35mil in 3QFY13 and RM79.8mil in 9MFY13.

- Excluding the forex loss, Kulim’s core net profit would have been above our expectations and consensus estimates. Kulim’s core net profit in 3QFY13 was driven by its Malaysian plantation unit. New Britain Palm Oil Ltd (NBPOL) did not perform well in 3QFY13.

- NBPOL’s pre-tax profit fell by 52.7% from US$9.3mil in 2QFY13 to US$4.4mil in 3QFY13. The fall in pre-tax profit was due to the unrealised forex losses and a slide in FFB production.

- According to NBPOL’s results announcement, the decline in FFB production in 3QFY13 was sharper than expected. This is after allowing for the fact that 3Q is usually a seasonally weak quarter for palm oil production in Papua New Guinea. NBPOL said that the soft production could be due to biological stress.

- FFB produced shrank by 23.5% QoQ to 325,626 tonnes in 3QFY13. NBPOL’s estimated average CPO price was US$859/tonne (RM2,782/tonne) in 3QFY13, 4.6% lower than the average price of US$900/tonne recorded in 2QFY13.

- EBIT of the Malaysian plantation unit eased 11.0% from RM125.5mil in 9MFY12 to RM111.6mil in 9MFY13 due to lower CPO price.

- The plantation division in Malaysia realised an average CPO price of RM2,463/tonne in 9MFY13, 20.4% weaker than the average price of RM3,093/tonne in 9MFY12. However, compared against MPOB’s (Malaysian Palm Oil Board) average spot price of RM2,323/tonne, Kulim’s average CPO price realised was 6% higher.

- Kulim’s FFB production grew by 20.7% YoY to 581,313 tonnes in 9MFY13. This was underpinned by the acquisition of oil palm estates from Johor Corp.

- Recently, Kulim announced that it has signed a MoU with PT Graha Sumber to explore investment opportunities in the oil and gas sector. Both companies may cooperate with regional and state-owned utilities to produce and sell compressed natural gas.

- We are neutral on this. Kulim’s risk profile is expected to change with the oil and gas venture. The group’s balance sheet might be affected as borrowings would have to increase substantially to finance the investment in oil and gas.

Source: AmeSecurities