KUL’s 1Q net profit may appear weak but we see this being mitigated in the upcoming quarters. Its associate NBPO has been dragging down group earnings since early-2012, but appears to have turned the corner. We are NEUTRAL on KUL but NBPO could be a good buy at current stock price, trading at just 10x CY14 earnings. Kulim’s stock price will eventually be lifted by New Britain.

- Annualised numbers below expectations. Kulim Malaysia (KUL)’s 1QFY13 core earnings of MYR19m made up 12% of our full-year forecast of MYR157m and 9% of consensus forecast. Note that our FY13 earnings forecast is about 17% lower than consensus’. Nevertheless, we believe KUL, particularly its associate company New Britain Palm Oil (NBPO), could make up for lost ground in the subsequent quarters, .

- NBPO suffers from heavyr rainfall. NBPO fared worse y-o-y in 1QFY13, as PBT plunged to USD4.8m from USD34.1m in 1QFY12, which was already impacted by heavy rains. Rainfall in 1QFY13 rose to 2.23m from last year’s 1.85m, causing fresh fruit bunches (FFB) production to drop to 405k tonnes from 427k tonnes in 1QFY12. In comparison, NBPO produced 474k tonnes of FFB in 1QCY11 while its oil extraction rate shrank to 21.70% from 22.36% last year. However, it seems that the worst is over and NBPO’s management said the company had recovered from last year’s deficit as at end-April. NBPO’s share price did not drop further following the releae of its 1QFY13 results on 14 May.

- Robust showing from Malaysian plantations. KUL’s plantations in Malaysia did well, registering a 12% increase in EBIT despite a 20% drop in the average CPO price. This was due to a 32% jump in FFB production, boosted by the acquired estates from Johor Corp and its replanting efforts over the years.

- Profit forecast. Our FY13 and FY14 earnings forecasts of MYR157m and MYR249 are based on an average CPO prices of MYR2,400 and MYR2,600 respectively. Our MYR3.53 FV is based on a target P/E of 18x. We believe the company could buy more plantation assets following the disposal of its fast food business. 

Source: RHB