- Kulim Bhd has proposed to acquire a 60% stake in PT Citra Sarana Energy (CSE) for US$133.6mil or RM462.7mil. CSE is involved in the exploration and development of an oil and gas block in Central Sumatera.

- CSE’s subsidiary, PT Radiant, is Kulim Bhd’s joint operator in the South West Bukit Barisan Oil and Gas Block in Central Sumatra. Kulim Bhd signed a joint operating agreement with PT Radiant and PT Graha in October 2014.

- PT Radiant is the lead operator in the project while Kulim and PT Graha are the cooperators, who will provide financial, technical and human capital support. Kulim is entitled to 60% of the project’s net profit.

- Kulim is increasing its investment exposure in the oil and gas project at a time when crude oil prices are plunging, while international oil and gas companies are cutting capex.

- We are not excited about Kulim’s investment as it is likely to bleed in the short term. With a 60% shareholding, CSE would be a subsidiary of Kulim.

- As such, Kulim would have to recognise the project’s expenses in its P&L and CSE’s borrowings in its balance sheet. We believe that the project would not be able to make up for the loss of profit from the disposal of New Britain Palm Oil Ltd in the immediate term. Kulim’s acquisition of CSE is expected to be completed in 1HFY15.

- We do not know if the purchase consideration of RM462.7mil is fair as CSE’s financials were not disclosed. We believe that CSE is likely to be loss-making as the oil and gas block is still under the exploration phase.

- According to the Bursa Announcement, the purchase consideration was arrived at after considering the professional valuer’s discounted cash flow valuation of the oil and gas block.

- Maintain HOLD on Kulim. The group is expected to receive its RM2.8bil proceeds from the disposal of New Britain Palm Oil Ltd in early-FY15F.

Source: AmeSecurities