Stock Name: KULIM
Company Name: KULIM (M) BHD
Research House: MIDF

Kulim Bhd
July 22, RM7.75
Neutral recommendation on stock remains with revised target price to RM7.92: The historical mean PER is eight times. However in view of the more streamlined operations, focusing on better margin and more stable businesses, we expect the PER rating of Kulim to be re-rated upwards in line with other mid-sized plantation groups which are trading at around the early teens. We thereby raised our target price to RM7.92 based on FY2011 PER of 10.5 times.

Kulim entered into a share sale agreement with PGEP Group Sdn Bhd, a subsidiary of Wilmar International Ltd, for the proposed sale of its 91.38% equity in Natural Oleochemicals Sdn Bhd (NatOleo) for a cash consideration of RM450 million (effectively valuing the entire NatOleo at RM492.5 million). The National Land Finance Cooperative Society Ltd holds the remaining 8.62% stake in NatOleo.

As at Dec 31, 2009, the net assets of NatOleo amounted to RM308.2 million. Hence the proposed disposal is pegged at 1.6 times its book value.

The rationale for the proposed disposal is to provide Kulim with an exit strategy to unlock the value of its investment in NatOleo, which produces mainly basic oleochemicals and is characterised by significant volatility in earnings. Hence, by disposing of NatOleo, Kulim will be able to focus more attention on its better-margin, stable and more profitable businesses, oil palm plantations and quick service restaurant under QSR Bhd.

Based on NatOleo's financial statements for FY2009 ended Dec 31, it incurred a net loss of RM23 million on the back on revenue of RM1.10 billion.

However in the quarter ended March 31, 2010, Kulim's oleochemicals business experienced a turnaround with a pre-tax profit of RM15.8 million in tandem with the recovery in the global demand for oleochemicals. The proposed disposal will result in Kulim forgoing NatOleo's earnings prospects of around RM20 million to RM30 million per annum as the global demand for oleochemicals recovers from the 2008/2009 economic slump.

Nevertheless, the proposed disposal will provide Kulim with immediate cash proceeds, which have been earmarked for future investment and working capital. Should the proceeds be re-invested in high profit-yielding assets, these investments may yield better returns to Kulim compared with the earnings forgone with the disposal of NatOleo. Kulim recently acquired 80% equity interest in CTP PNG Ltd for US$200 million.

Hence, proceeds from the disposal of NatOleo may be used to refinance the purchase and further capital expenditure of CTP. In the interim, however, the RM450 million cash proceeds may earn Kulim around RM12 million per annum in additional income.

Kulim is expected to record an accounting gain of approximately RM168.3 million arising from the sale of NatOleo, which translates to a gain of approximately RM0.54 per share. ' MIDF Research, July 22


This article appeared in The Edge Financial Daily, July 23, 2010.