Kulim - Fairly valued for now HOLD

- We downgrade Kulim Bhd from BUY to HOLD with a slightly lower fair value of RM4.35/share. Our new fair value excludes earnings from the fast food assets. 

- We have tweaked Kulim’s earnings down to account for the loss of earnings from the sale of some of the shipping assets.

- Based on the ex-dividend share price of RM4.04, our fair value of RM4.35/share would suggest an upside of only 8%.   

- At RM4.04, Kulim’s fully-diluted FY13F PE would be about 16.7x compared with the sector average of 16x. The exdate of Kulim’s special dividend of 90.94 sen/share is 9 January 2013. 

- Going forward, catalysts for a re-rating of Kulim’s share price would be higher-than-expected earnings from New Britain Palm Oil Ltd (NBPOL), acquisition of plantation assets at fair pricing and rising CPO prices. 

- After the sale of the fast food assets, Kulim would become a purer plantation company with an indirect exposure to Papua New Guinea via its 49% stake in NBPOL. 

- According to Bloomberg consensus estimates, NBPOL’s net profit is forecast to rebound 56% from US$54.5mil in FY12F to US$85.2mil in FY13F. 

- We reckon that NBPOL’s earnings recovery would be underpinned by improved FFB yields, which were affected by wet weather in early-FY12F. 

- We believe Kulim would continue to sell its remaining shipping assets. The net asset of the intrapreneur division (comprising mainly shipping assets) stood at RM93.8mil as at end-FY11. 

- After the proposed sale of its 36% stake in Orkim Sdn Bhd for RM110mil, we estimate that Kulim would have about eight vessels left, with a total capacity of 85,000 dwt. The proposed sale of Orkim is due to be completed by 1QFY13. Gain on the disposal is estimated at RM72.4mil. 

- However, opportunities for more special dividends are expected to be muted due to the small value of the shipping division. Kulim has mentioned that it would be using the proceeds from the disposal of Orkim for working capital.

Source: AmeSecurities