Kulim is making a partial offer to buy up to 30m shares in New Britain Palm Oil (NBPO) for MYR812.3m in cash or GBP5.50 per share. This will raise its stake in NBPO to as high as 69%.  We are positive on the move as  it  is earnings accretive for Kulim, with its  FY14 earnings  potentially be boosted by 8%. Our FV could be raised to MYR3.80 if it successfully buys  the  30m  NBPO  shares.  Maintain  our  FV  and  NEUTRAL  call  on Kulim.

- Offering to buy 30m NBPO shares.  Kulim has made a partial offer to buy up to 30m NBPO shares at GBP5.50 per share. If successful, this will  raise  its  stake  in  NBPO  to  68.97%  from  the  current  48.97%.  The MYR812.3m  purchase  will  be  carried  out  by  cash,  funded  by  a  mix  of borrowing  and  internal  funds.  Kulim’s  net  gearing  will  rise  from  the current 0.17x to 0.46x, which is still comfortable. 

- If not now, when?  We believe  it is an opportune time for Kulim to raise its stake in NBPO. Management had indicated several years ago that it will raise its NBPO stake at the right price. However, NBPO’s stock price had  stayed  persistently  high  over  the  past  few  years,  making  it expensive  for Kullim  to raise  its stake in the company. However, since last year, NBPO’s stock price has suffered as its earnings plunged due to  unusually  heavy  rainfall.  As  the  weather  effect  is  temporary,  this creates an opportunity for Kulim to buy cheaply. 

- NBPO still inexpensive. We mentioned in our note dated 27 May 2013 that  NBPO  could  be  a  good  buy  as  it  was  trading  at  only  10x  CY14 earnings, assuming normalized weather conditions.  NBPO’s stock price has since  surged  by some 30%. Still, we  believe there  could be  further upside  from  current  levels,  as  the  stock  is  trading  at  13.5x  CY14 earnings with potentially stronger earnings.

Source: RHB