Kulim's stock price will  adjust  after  the  90.9  sen  special  dividend  today.  As  the stock  recently  hit  a  high  of  RM5.20,  we  deem  it  having  reached  our  RM5.22  FV. Hence  we  are  trimming  our  ex-dividend  FV  to  RM3.38,  or  RM4.29  cum  dividend. This  is  premised  on  a  lower  earnings  forecast  in  line  with  our  lower  CPO  price assumption  of  RM2,750  for  CY13,  but  mitigated  by  a  higher  target  PE  as  the company's structure is  streamlined.  We  believe  CPO  price  will  gain  strength  in 2014 but the stock is likely to languish for a while following the special dividend.   

A new beginning. Kulim will start 2013 as a purer plantation company after disposing of QSR  Brands  to  a  consortium  led  by  its  parent  company,  Johor  Corp.  Being  a  purer plantation  company  will  warrant  a  rerating  of  Kulim's PE valuation since  it  no  longer owns a sizeable fast food business that will cloud its valuation. Note that Kulim still has some non-plantation businesses, such as its shipping business catering to the oil & gas industry  which  it  acquired  from  the  takeover  of  Sindora. We  are  now  applying  a  target PE of 16x on the stock compared to 14.4x before.

Malaysian plantation propels growth. Kulim's Malaysian plantation has been enjoying good  production  growth  due  to  yield  recovery  and  more  importantly,  contribution  from estates it acquired from Johor Corp. For the first 11 months of 2012, FFB output grew by 9.5%  but  in  2H  alone  growth  was  much  stronger  at  25%.  We  are  factoring  in  a production growth of 16% for CY13.

New Britain to do better. 2012 was a washout year for associate New Britain Palm Oil due to adverse weather,  but the going should improve significantly in  2013. We expect New Britain's profits to rebound by some 22% this year.

Still a good geographical diversification. We continue to like the unique geographical diversification  provided  by  Kulim  via  its  presence  in  Papua  New  Guinea  and  the Solomon  Islands,  which  will  prove  very  useful  in  the  event  of  a  region-wide  El  Ninodrought.

Neutral on stock. Incorporating the factors above, we expect Kulim to register core net earnings of  RM262.1m for  2013.  Excluding  the  special  dividend,  Kulim  is  trading  at  an unattractive PE of 18.3x CY13 earnings. In view of this, we suspect that the stock price is likely to languish for a while. Having said that, should CPO price swings up, the stock will  benefit  from  its  high  sensitivity  to  palm  oil  price  (earnings  +9.1%  if  palm  oil  price rises by RM100). This is due to the absence of export duty or windfall tax in Papua New Guinea. We are Neutral on the stock, as stated in our 2013 Strategy report.

Source: OSK