Based  on  the  sharply  better  results  from  associate  company  New Britain  Palm  Oil  (NBPO  LN,  NR)  and  its  own  stronger  FFB  production, we expect Kulim’s 2QFY13 results to be significantly better q-o-q. While its inability to secure additional stakes in NBPO is a negative, it goes to show  that  the  group  has  an  undervalued  asset  in  NBPO.  We  maintain our NEUTRAL call on Kulim, with our FV unchanged at MYR3.53.  
 
- NBPO’s  earnings  sharply  higher.  NBPO’s  2QFY13  PBT  shot  up 93.8% q-o-q to USD9.3m as weather in Papua New Guinea normalised in April. In 1QFY13, NBPO’s earnings were adversely affected by heavy rainfall  amounting  to  2.23  metres  in  a  single  quarter.  Given  that  NBPO makes  up  a significant proportion of Kulim’s earnings (28% in 1Q), the improvement  in  its  2Q  earnings  should  see  a  corresponding  surge  in Kulim’s 2Q earnings. We  estimate  Kulim’s 2QFY13  PBT  will  rise  to MYR39m from MYR25m for 1QFY13.  

- Malaysian  plantations  doing  well  too.  We  also  expect  Kulim’s plantations  in  Malaysia  to  show  further  earnings  improvement,  with 2QFY13 fresh fruit bunches (FFB) production rising 12.4% q-o-q. Against 1H last year, Kulim’s FFB production jumped  29.8%  due  to  contribution from  estates  acquired  from  Johor  Corp.  Recall  that  in  1QFY13,  Kulim’s Malaysia  operations  posted an  11.7%  y-o-y  increase in  EBIT,  making  it one of the few companies with strong earnings despite a 20% decline in crude  palm  oil  (CPO)  prices.  We  expect  this  earnings  momentum  to continue.  Our  FY13  forecast  earnings  of  MYR156m  looks  achievable despite the company having made only MYR19m in 1QFY13.  

- Setback  in  raising  NBPO  stake.  NBPO’s  board  and  independent advisers  have  advised shareholders to reject Kulim’s offer to  buy  30m NBPO shares at GBP5.50 each, as the offer price was deemed too low. The independent advisers value NBPO at GBP6.50-7.00 per share. The acquisition, if successful, would be earnings accretive and boost our FV for Kulim to MYR3.80. However, all is not lost even if the takeover offer fails,  as  Kulim  is  NBPO’s single largest shareholder and  hence  the biggest  beneficiary  if  the  latter  is  worth  GBP6.50-7.00/share.  Pricing NBPO  at  GBP7.00  implies that Kulim’s Johor  estates  are  valued  at MYR68.7k  per  ha,  or  MYR0.64  per  sq  ft,  which  is  cheap  considering some of its estates are prime property development land. 

Source: RHB