Kulim - Valuations more attractive now BUY

- We are upgrading our recommendation on Kulim Bhd from HOLD to BUY due to the fall in its share price. Valuations are more palatable now as reflected in Kulim’s fully-diluted FY13F PE of 15x. We have marginally tweaked the group’s FY13F earnings forecast for housekeeping reasons.

- We believe that Kulim’s share price would be driven by earnings instead of newsflow. Newsflow, if any, would come in the form of acquisition of assets and disposal of the remaining shipping assets. 

- However, we reckon that it would take time for Kulim to seek and evaluate acquisitive proposals. 

- Alternatively, we believe that a faster option would be for Kulim to increase its shareholding in NBPOL (New Britain Palm Oil Ltd). 

- We estimate that it would cost Kulim about RM42mil to increase its equity interest in NBPOL by 1-percentage point. Interestingly, Kulim’s dividend income from NBPOL is expected to be RM40.6mil based on consensus estimate of a DPS of 18.3 US cents for FY12F. Currently, Kulim owns 49% of NBPOL.  

- We expect the 31% increase in Kulim’s net profit in FY13F to be underpinned by volume recovery, stabilisation of production cost per tonne and lower minority interest.

- We forecast an FFB production growth of 14% in FY13F aided by yield enhancements and acquisition of estates from Johor Corp. In total, Kulim would have an additional 13,687ha of plantation landbank from the acquisition. 

- Production costs per tonne are expected to remain relatively unchanged from FY12F’s RM1,500/tonne (all-in costs including office overheads). 

- Fertiliser costs are envisaged to decline in FY13F. An industry player has said that its fertiliser costs  would decline by almost 7% in 1HFY13F.

- Minimum wage is not expected to have a significant impact as plantation companies in Peninsular Malaysia had already increased the base pay and implemented the increment of RM200/month in late-2011.

- In any case, Kulim would try to increase the productivity of its estate workers.

- For instance, the group could expand the land coverage of its estate workers from a ratio of one worker to 10ha to one worker to 12ha. This would result in higher FFB yields, which should offset increased wage cost.   

Source: AmeSecurities