Kulim (M): Heavy Rainfall Dampens Profit

Kulim’s 9MFY12 earnings were nearly drowned by extremely weak results from NBPO, which in the 3Q continued to feel the spillover effects of 2Q’s heavy rainfall. We strongly believe the latter’s operations will return to normal in 2013 and profits recover strongly. Meanwhile, Kulim’s Malaysian plantations have begun to see very robust production growth due to yield recovery and contribution from acquired estates. As the pallid results were due to factors beyond management’s control, we recommend taking advantage of the stock’s price weakness to BUY.

Weak 9M results. Kulim’s 9M core earnings of RM136.5m were way short of our full-year forecast of RM367.7m due to disappointing results from 49.5%-owned associate New Britain Palm Oil (NBPO). NBPO continued to report tepid 3Q PBT of just USD12.5m due to the effects carried over from exceptionally heavy rain from 2Q. Note that despite the weak profits, its 9M operating cash flow still tripled y-o-y to RM1.3bn.

A washout year for NBPO. NBPO performed poorly due to exceptionally heavy rainfall in 2Q, as the effects spilled over to 3Q. Meanwhile, the harvesting rounds in 3Q were higher than the norm of 10 to 14 days at 27 days due to a backlog resulting directly from the floods. Kulim’s management guided that moving into 2013, NBPO’s production will recover to 2011 levels. However, the 4Q results will likely remain weak as CPO prices have weakened and the company has already missed the peak crop season. We are trimming NBPO’s PBT forecast to USD89.2m, from USD178.8m previously.

Malaysian plantation shines. One bright spot in Kulim’s results was the sharp q-o-q increase in its Malaysian plantation profits. Segmental EBIT surged by 158.5% sequentially to RM66.4m due to a 50.1% increase in FFB production. The much higher production was due to yield recovery and the contribution from new estates acquired from parent company Johor Corp, the second part of which was completed in May.

Cutting earnings forecasts. Due to NBPO’s very weak 3Q results, we are slashing our FY12 earnings forecast from RM367.7m to RM240.1m. We are also conservatively reducing our FY13 forecast to RM375.8m, which excludes QSR’s contribution. The privatization of QSR/KFC is expected to be completed at end-2012 or early 2013, following which Kulim shareholders will receive an estimated special dividend of 93 sen per share. Based on the ex-special dividend price, Kulim is trading at an undemanding 11.5x CY13 PE.

Lower FV. In line with the lower 2013 earnings estimate, we are reducing our cum-special dividend FV to RM5.22, assuming a slightly higher target 14.4x PE vs 13x earlier. As a pure plantation play, we expect Kulim’s PE to re-rate. Maintain BUY.

FYE Dec (RMm)	FY09	FY10	FY11	FY12f	FY13f
Revenue	5806.2	5486.8	7041.8	4256.0	955.7
Net Profit	145.8	387.4	472.5	240.1	375.8
% chg y-o-y	-54.9	165.6	22.0	-49.2	56.5
Consensus	-	-	-	375.0	409.5
EPS	11.6	31.0	38.4	19.0	29.8
DPS	4.4	12.5	5.0	5.0	6.0
Dividend yield (%)	1.0	2.9	1.1	1.1	1.4
ROE (%)	4.4	11.2	12.6	5.8	8.5
ROA (%)	2.0	4.6	5.4	2.4	3.4
PER (x)	37.7	14.1	11.4	22.9	11.5
BV/share	2.65	2.88	3.19	3.37	3.61
P/BV (x)	1.6	1.5	1.4	1.3	1.2
EV/EBITDA (x)		-	-	10.4	14.2

Results Table (RMm)

FYE Dec	3QFY12	2QFY12	Q-o-Q	YTD	YTD	Y-o-Y	Comments
			chg	FY12	FY11	chg
Turnover	1184.5	1389.6	-14.8%	4237.1	5240.1	-19.1%
EBIT	120.4	108.3	11.2%	419.9	1116.7	-62.4%
Net interest expense	-21.7	-23.4	-7.4%	-71.1	-54.7	30.1%
Associates	19.6	38.1	-48.6%	59.3	5.4	991.7%
PBT before EI	118.3	123.0	-3.8%	408.0	1067.5	-61.8%
EI	19.3	1950.4	-99.0%	1992.3	0.0	#DIV/0!
PBT	137.6	2073.4	-93.4%	2400.4	1067.5	124.9%
Tax	-34.1	-39.3	-13.1%	-119.1	-274.5	-56.6%
MI	-41.8	-35.7	16.8%	-152.4	-348.6	-56.3%
Reported Net Profit	61.7	1998.4	-96.9%	2128.9	444.5	379.0%
Core Net Profit	42.4	48.0	-11.6%	136.5	444.5	-69.3%
Core EPS (sen)	3.42	3.93	-13.0%	11.00	36.30	-69.7%
DPS (sen)	0.0	0.0		0.0	5.0
EBITDA margin	10.2%	7.8%		9.9%	21.3%
NTA/share (RM)	4.46	4.32		4.46	2.50
Revenue, RM'm
Plantation
- Malaysia	184.0	167.0	10.2%	511.9	618.9	-17.3%
- PNG	0.0	226.7	nm	763.8	1862.8	-59.0%
QSR	887.0	896.6	-1.1%	2641.0	2426.8	8.8%
Others	141.8	99.4	42.6%	348.7	331.5	5.2%
Discontinued Ops	-28.3	0.0	nm	-849.0	-1949.2	nm
	1184.5	1389.6	-14.8%	3416.4	3290.9	3.8%
EBIT, RM'm
Plantation
- Malaysia	66.4	25.7	158.5%	125.5	182.7	-31.3%
- PNG	0.0	22.0	-100.0%	136.7	679.0	-79.9%
QSR	67.9	59.0	15.1%	190.0	197.2	-3.6%
Others	25.7	16.0	61.2%	71.8	63.3	13.5%
Discontinued Ops	-0.8	0.0	nm	-139.9	-682.2	nm
	159.3	122.7	29.9%	384.2	439.9	-12.7%
FFB production
- Malaysia	221,678	147,678	50.1%	481,461	465,810	3.4%
Realized CPO price
- Malaysia - RM	3,052	3,150	-3.1%	3,093	3,248	-4.8%
FFB processed
- Malaysia	317,503	189,920	67.2%	674,960	683,850	-1.3%
OER
- Malaysia	20.4%	20.0%	2.0%	20.3%	20.1%	0.6%

EARNINGS FORECAST

FYE Dec (RMm)	FY09	FY10	FY11	FY12f	FY13f
Turnover	5806.2	5486.8	7041.8	4256.0	955.7
EBITDA	885.3	1033.0	1752.2	908.4	664.2
PBT	521.9	784.0	1262.7	547.5	552.7
Net Profit	145.8	387.4	472.5	240.1	375.8
EPS	11.6	31.0	38.4	19.0	29.8
DPS	4.4	12.5	5.0	5.0	6.0
Margin
EBITDA (%)	15.2	18.8	24.9	21.3	69.5
PBT (%)	9.0	14.3	17.9	12.9	57.8
Net Profit (%)	2.5	7.1	6.7	5.6	39.3
ROE (%)	4.4	11.2	12.6	5.8	8.5
ROA (%)	2.0	4.6	5.4	2.4	3.4
Balance Sheet
Fixed Assets	6256.7	7311.8	9053.8	8708.4	9216.6
Current Assets	1817.3	1912.6	2521.6	1538.0	1113.0
Total Assets	8074.1	9224.4	11575.4	10246.4	10329.6
Current Liabilities	1392.1	1724.7	1458.4	1172.7	536.9
Net Current Assets	425.2	187.9	1063.2	365.3	576.1
LT Liabilities	3310.6	1817.3	3587.0	5088.0	5788.0
Shareholders Funds	3371.4	3675.6	4063.6	4295.6	4596.2
Net Gearing (%)	25.0	40.4	48.6	43.5	46.3

 Source: OSK