New Britain's earnings a let-down. 49.5%-owned New Britain reported net profit of USD45.9m for 1HFY12, nearly half of the USD89.6m earnings achieved in same period last year. PBT for 1HFY12 was at USD63.6m, against USD149.8m last year. Management attributed the decline to:

i)              lower CPO volume from heavy rainfall responsible for the USD33.1m decline in PBT,

ii)             weaker CPO price, to which it attributed USD6.0m of the profit decline,

iii)            lower PKO price, causing USD11.7m decline in profit,

iv)            rise in the Kina against USD, to which it attributed USD16.0m of the decline,

v)             a delay in the cane crushing season due to adverse weather, resulting in a USD9.5m negative impact on profitability. This, however, is a factor which will reverse in 2HFY12.

Production forecast cut for New Britain. New Britain's 7.9% decline in its own FFB production was particularly damaging as the 1H is its seasonally-strong period. Management does not think that 2H12 will be stronger than the 1H despite the latter being affected by abnormally heavy rainfall (>2500mm in 1H, which is the amount of rainfall West Malaysia gets for an entire year). The company expects to process 1.08m tonnes of FFB in the 2H, compared to 1.22m tonnes in the 1H. We are trimming our FFB production forecast to 1.599m tonnes for FY12 from 1.699m tonnes earlier.

New Britain still provides good exposure. Though we are disappointed with New Britain's 1H12 earnings, this is one of the rare occasions in which it failed to deliver. We continue to like New Britain for its unique geographical diversification, even as it suffers from less drag due to the rising CPO price. Unlike Indonesia's export duty and Malaysia's windfall tax, PNG does not have measures which tax palm oil producers more on higher prices.

Acquisition of JCorp's estates. Kulim completed the acquisition of Mungka Estate, Kemedak Estate and Palong Estate from its parent company with effect from end-May. These three estates total 5,643 ha in land area and 4,499 ha in planted area, bringing Kulim's oil palm planted area in Malaysia to 44,822 ha. To recap, Kulim entered into a conditional agreement in August 2011 to acquire six estates from Johor Corp,  with a total land area of 13,687 ha and planted area of 12,032 ha. Of the six, the acquisition of Sungai Papan Estate and Siang Estate were completed in Dec 2011, leaving the only remaining parcel of the Pasir Panjang Estate.

Production recovery can't make up deficit. From a 7.6% y-o-y decline in 6M production, Kulim's Malaysian plantations narrowed the gap to a 3.2% y-o-y decline for 7M. July's FFB numbers came in at 67.5k tonnes, representing an 18.3% jump from last year. The strong recovery was due to: i)a natural recovery in yield after a weak 1H, ii)an increase in planted area with the completion of 4,499 ha of planted area from Johor Corp in early June. The trend is consistent with Johor state's production, in which June was down by 12.6% y-o-y but July registered almost flat growth y-o-y. However, based on 7M production numbers, Kulim will not be able to hit 800k which we have factored into our forecast. We have trimming our FY12 production forecast for Malaysian plantations to 675,464 tonnes (based on 10% y-o-y growth for Aug and 18.3% y-o-y growth for Sept ' Dec), which still represents growth of 6.1%.

Age profile best since 2007. Kulim's Malaysian plantation age profile is at its best since 2007 with 60% of trees being in young & prime mature stage. Its old & due trees are also the least since 2007 at 27%. This age profile is supportive of much higher production. Based on the currently-planted 44,822 ha, Kulim's Malaysian plantations should be able to produce 941,000 tonnes of FFB based on a yield of 21 tonnes/ha. However, we have only factored in 709,000 tonnes for CY13, assuming 5% growth from this year, leaving room for an upward revision.

Forecast change. With weaker-than-expected production from both the New Britain and Malaysian plantations, we cut our FY12f net profit by 26.2% to RM367.7m, based on the abovementioned production numbers. We also slightly reduced our FY13f earnings to RM487.1m from RM512.2m, a cut of 4.9%. Based on our reduced forecast, Kulim now looks pricey based on FY12 numbers at 17.8x earnings. On FY13 numbers however, Kulim still looks cheap at 11.0x based on its ex-special dividend stock price of RM4.26. Our FY13 forecast does not include any QSR/KFC contribution and as such, we have also adjusted the current stock price 93 sen lower to derive the ex-special dividend price. Based on the reduced profit forecast for FY13, our cum-special dividend FV is trimmed from RM6.21 to RM5.95, based on 13x CY13 earnings.

EGM probably in Sept. Indication of timing for QSR/KFC's EGM (to get shareholders' approval for the business sale) is in Sept. We believe there will be a further stock price re-rating once the EGM is called, as it will confirm that  the sale is getting nearer than ever to completion. Kulim's management has committed to pay out the sale proceeds to shareholders as a special dividend, which will amount to RM1.15bn or 93 sen per share.

Higher dividend in store? Management has guided that its regular dividend will likely remain the same in RM terms this year as its debt covenant does not allow it to raise dividends. However, post-refinancing next year, Kulim will be able to raise its dividend payout.