INVESTMENT MERIT

We are issuing a NOT RATED call on KUB with a FV of RM0.45 per share based on Fwd. FY17E PER of 10.6x. Although the disposals of non-performing assets have paved the way for expansions in Energy and Plantation segments, we expect long gestation periods while earnings remain stable over the mid-term.

Turning leaner. KUB Berhad (KUB) holds a diversified with key interests in Energy (63% of 9M16 revenue), ICT (19%) and Agro (8%) segments. It also operates Food (9% of 9M16 revenue), and other businesses (<5% respectively). KUB has been on a divestment track for non-contributing assets, with the disposal of A&W Thailand (RM3.7m) and KUB Precast (RM19.0m). We view this positively, as reduced loss-making entities allow the company to focus on its key segments. KUB also holds investment properties in Perak, Kelantan, Selangor, and Johor with a book value of RM12.6m. Management has mentioned a market value of c.RM30m for these assets. Although a sale of these assets would increase net cash position by 60% to c.RM80m (c.14.4 sen/share), we do not think this will affect dividends as we expect the funds to be used for expansions as noted below.

Focus on key segments. The ICT segment showed the highest 3- year CAGR at 24%, with an outstanding order book of RM76.6m to contribute to FY16-17E EBIT RM9.7-10.4m. Meanwhile, the Energy segment has seen a 3-year EBIT CAGR of 6%, with FY16-17E EBIT of RM25.8-22.8m. We expect margins going forward to be supported by lower LPG prices on crude oil price weakness and productivity improvements. As for the Plantation segment, we note its 3-year EBIT CAGR of 2% and expect FY16-17E EBIT recovery to RM5.3-9.1m on CPO price recovery and lower startup losses on its new palm oil mill, likely operational by mid-2017. In all, we estimate moderate earnings growth in FY16-17E of RM20.5-23.8m (+10-16%) driven by Energy margin expansion and Agro margin recovery on higher CPO prices.

Potential for long term expansion. In its 2015 annual report for its Energy segment, management plans to “work with industry players on potential strategic collaborations” allowing KUB to increase production volume. Assuming KUB can double their Energy assets to RM211m, based on their Energy segment 3-year average ROA of 8% then we can expect an additional annual PAT of RM5.5m, or +27% on 2015 earnings. Management mentioned it is also looking to increase its Plantation land bank and production capacity. Assuming a comfortable gross gearing of 20%, we estimate KUB could raise up to RM160m for CAPEX of which RM50-60m could be used to increase its land bank by 1.2-2.5k ha (+10-20%) depending on greenfield or brownfield acreage. While we are positive on any potential expansions, we note that the gestation period is likely to be long; assuming they start expansion plans this year, significant earnings contributions may only be felt from FY19 onwards.

Fully valued in the near term. We assign a NOT RATED call on KUB with a Fair Value of RM0.45 based on a Fwd. PER of 10.6x applied to FY17E EPS of 4.3 sen. Our Fwd. PER of 10.6x is based on mean valuation which we think is fair given the stabilising earnings trend in its key segments but potentially long gestation period on expansions. Our TP implies a total return of 8.2% (upside: 5.6%, dividend yield: 2.6%), justifying our NOT RATED call. Nevertheless, in view of management’s ambitions, we will re-visit the stock with upside bias, once further details are released for the Energy or Plantation segments’ growth plans. Investors could look toward higher valuations upon confirmation of expansion, at +0.5SD implying a Fwd. PER of 12.6x, or a Fair Value of RM0.50.

Source: Kenanga Research - 25 Jan 2017