- Maintain SELL on Kulim Bhd with a higher DCF-based fair value of RM2.55/share. We have raised Kulim’s FY15F earnings forecast significantly to account for better-thanexpected profits from the oil and gas support unit, which is undertaken by EA Technique.

- In spite of the earnings upgrade, Kulim’s PE valuations are still expensive at 46.1x FY15F EPS and 37.3x FY16F EPS. Our fair value of RM2.55/share implies FY15F PE of 42.0x and FY16F PE of 34.8x. We believe that Kulim’s share price has been rising on share buybacks and anticipation of the payment of the second special dividend.

- However, Kulim did not declare any dividend in its 2QFY15 results. Hence, we think that the remaining gross DPS of 40 sen would be declared during the 2HFY15 results announcements. Recall that the first special dividend of 37.65 sen/share was paid in March 2015.

- EBIT of the oil and gas support unit climbed from RM9.6mil in 1QFY15 to RM28.9mil in 2QFY15 as revenue surged from RM78.8mil to RM219.9mil. The jump in earnings was due to a new contract secured by EA Technique.

- The contract value is USD191.8mil for a period of 20 months. The contract involves the engineering, procurement, construction and commissioning of a floating storage offloading facility for the North Malay Basin in Peninsular Malaysia.

- Plantation operating profit fell by 51.7% YoY to RM39.9mil in 1HFY15 due to higher production costs and lower CPO. Average CPO price realised was RM2,267/tonne in 1HFY15 against RM2,584/tonne in 1HFY14. Kulim’s FFB production rose by 5.3% YoY in 1HFY15.

- Operating loss of the agro-foods division (mainly cattle business) widened from RM3.1mil in 1HFY14 to RM9.4mil in 1HFY15. On a quarterly basis, the loss narrowed from RM9.2mil in 1QFY15 to RM0.3mil in 2QFY15.

- Kulim’s net cash declined from RM1.2bil at end-March to RM932mil as at end-June 2015 as the group’s borrowings rose from RM749.5mil to RM812mil while gross cash shrank from RM1.96bil to RM1.7bil.

- As mentioned in previous reports, Kulim’s oil and gas well in Central Sumatera is expected to commence commercial production in early-2016F. We are not excited over this due to the risk of losses. Kulim has a 60% stake in the oil and gas entity.

Source: AmeSecurities Research - 26 Aug 2015