Johor Corp has proposed to privatise the company at MYR4.10/share. Maintain BUY, but increase TP to MYR4.10 (from MYR3.74, 24% upside)as the attempt is likely to succeed given that Kulim’s stock price wouldunlikely reach that level otherwise. We view the privatisation offer price as generous, being some 9.6% above TP and factoring in the second tranche of its special dividend from sale of NBPOL.

The privatisation. Kulim Malaysia’s (Kulim) controlling shareholder Johor Corp, which holds a 61.87% stake, has informed the company of its intention to privatise it. Entitled shareholders are expected to receive an estimated capital repayment of MYR2.2bn in cash or MYR4.10/Kulim share. Entitled shareholders are basically any shareholder other thanJohor Corp or its affiliated companies. Entitled shareholders need to accept the offer by 20 Nov.

Rationale. Johor Corp cited a lack of immediate catalyst for Kulim’s stock price as its oil exploration foray may take longer than expected. Nevertheless, we believe there is value to be unlocked by Johor Corp over the longer term. Potential value boosters for Kulim include: i) a potentially valuable oil find in its oil exploration venture, ii) steady improvement in its palm oil yield given that its age pr ofile is now at its best ever, and iii) Microsoft (MSFT US, NR) setting up operations in Sedenak, Johor where Kulim has around 4,554ha of land. However, none of these are likely to push Kulim’s stock price to MYR4.10 over the next 12 months.

Subject to conditions. The privatisation is subject to the typical conditions such as: i) 50% approval from entitled shareholders at its EGM with 75% in value, ii) must not be voted against by >10% of entitled shareholders, and iii) other regulatory approvals.

Likelihood of success. We believe the privatisation attempt is likely to be successful given the generous price offered, which is 24% above its last closing price. The offer price has also taken into consideration the promised special dividend amounting to an estimated 37 sen from the sale of New Britain Palm Oil Ltd (NBPOL). That said, Kulim has around 16% institutional shareholding, which collectively could block the privatisation exercise.

Source: RHB Research - 6 Nov 2015