Kulim (M) - Purer plantation play after sale of fast food assets BUY

Maintain BUY on Kulim with a higher RNAV-based fair value of RM5.00/share (vs. RM4.25/share previously). Our new fair value is mainly based on a PE of 11x on FY12F plantation earnings. Our previous assumption was 10x. 

Kulim’s PE (based on historical EPS) ranged from a low of 3x to a high of 19x in the past seven years. Its average PE was 10x.

Kulim’s core net profit was within our expectation but above consensus estimates. The group has not declared any final gross DPS for FY11. Interim gross DPS was 5 sen in FY11.

After the disposal of QSR Brands and KFC Holdings, Kulim Bhd would be a purer plantation company. There is also potential for Kulim to declare higher dividends from the cash it receives from the disposal of QSR and KFC. 

However in terms of earnings, the disposal of QSR and KFC would have a negative impact. We have reduced Kulim’s FY12F earnings forecast by 6% to account for loss of earnings from the fast food division. We have assumed that the disposal of the fast food division would be completed by mid-FY12F. 

Kulim’s EBIT rose 44.3% YoY to RM1.1bil in FY11 driven by the full-year impact from the acquisition of Kula Palm Oil Ltd in Papua New Guinea (PNG).

As a result, operating profit of the PNG plantation division climbed 95.8% YoY to RM893.2mil in FY11. FFB production of the PNG division surged 32.3% to 1.7mil tonnes in FY11. 

Average CPO price realised by the PNG division was US$1,108/tonne (RM3,389/tonne). This was higher than the average CPO price of RM3,278/tonne reported by MPOB (Malaysian Palm Oil Board) in FY11.

As for Malaysia, EBIT of the plantation division rose 11.3% to RM236.6mil in FY11 underpinned by an improvement in CPO prices and output. After  recording a flat output in FY10, Kulim’s FFB production in Malaysia improved by 15.5% in FY11. 

This is a trend which is consistent with the other plantation companies in Malaysia. Average CPO price realised by the plantation division in Malaysia was RM3,193/tonne in FY11, 22.6% higher than the average price of RM2,604/tonne recorded in FY10.

Source: AmeSecurities