We are maintaining our NEUTRAL call on Kulim, with an unchanged FV of  MYR3.53,  on  the  lack  of  upside.  Its  2Q13  results  were  weaker  than expected  as  its  Malaysian  plantation  had  negative  q-o-q  earnings growth  despite  stronger  production.  The  company  has  reconsolidated New Britain Palm Oil (NBPO), which is a non-event.   
 
- Weaker  than  expected.  Kulim’s  2Q13  core  earnings  came  in  at MYR37.1m,  bringing  YTD earnings  to  MYR56.2m,  making up  only  one-third  of  our  forecast  of  MYR156m.  This  was  despite  achieving  CPO prices above MPOB average. In view of this, we trim our FY13 earnings forecast by 15% to MYR133m, after factoring in higher cost of production for  its  Malaysian  plantation  at  MYR1,450  per  tonne  compared  to MYR1,300  earlier.  Our  FY14  earnings  forecast  is  maintained  at MYR245m  as  the  year  will  see  NBPO’s profitability  normalise  after suffering from exceptionally heavy rainfall in FY12 and FY13.

- Reconsolidation of NBPO. The company has decided to reconsolidate NBPO as required under FRS10 accounting standard as its 49% stake in the  latter,  as  at  end-2012,  is  deemed  a  controlling  stake  due  to  the dispersed nature of NBPO’s shareholding. We view the consolidation as a  non-event.  Since  then,  it  has  secured  an  additional  4.88m  NBPO shares,  representing  an  additional  3.26%  stake,  from  its  partial  offer  to buy  NBPO  at  GBP5.50.  Kulim  has  been  restrained  by  the  Securities Commission of Papua New Guinea (PNG) until 10 Sep from making any further attempt in acquiring more NBPO shares.  

- Maintain  NEUTRAL.  Kulim  is  trading  at  a  relatively  demanding  FY14 P/E of 17x, which will limit the stock’s upside performance. Our  FV (unchanged)  is  based  on  18x  CY14  earnings.  Risk  to  our recommendation includes it raising its stake in NBPO, in which case our FV will be raised to MYR3.80. Resistance from various parties, including PNG  authorities,  against  the  partial  offer  means  that  the  likelihood  of Kulim  being  able  to  raise  its  stake  in  NBPO  by  30m  shares  is  rather remote.  

Source: RHB