All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request.
Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 1 of 4
Kulim (Malaysia)
Recommendation:
BUY
Stock Code:
2003
Bloomberg:
KUL MK
Price:
MYR8.55
12-Month Target Price:
MYR9.50
Date:
September 2, 2010
Price (MYR)
3.004.005.006.007.008.009.0010.0011.00Price30 Day Moving Average
Board:
Main
Sector:
Plantation
GICS:
Consumer Staples/Agricultural Products
Market Value - Total:
MYR2,670.6 mln
Summary:
Kulim is an integrated palm oil producer, with oilpalm plantations in Malaysia, Papua New Guinea and theSolomon Islands, and downstream oleochemical operationsin Malaysia. Kulim is also the controlling shareholder of KFCand Pizza Hut chains in Malaysia, Singapore and Brunei.The stock is a component of FBM EMAS and FBM 70.
Analyst:
Siti Rudziah Salikin
Vol ('000)
02,0004,0006,000Aug 07Nov 07Jan 08Mar 08May 08Aug 08Oct 08Dec 08Feb 09May 09Jul 09Sep 09Nov 09Jan 10Apr 10Jun 10Aug 10Volume
Results Review & Earnings Outlook
•
Kulim’s 2Q10 net profit dropped 76.3% QoQ to MYR14.7 mln, whichwas unexpected. The weak results were due to: (i) higher pretax lossat Natural Oleochemical Sdn Bhd (NatOleo), which is being disposedof; and (ii) a write-off charge of MYR20.3 mln due to the Nexsol (M)and Nexsol (S) rationalization exercise, which is non-recurring.
•
1H10 net profit still grew 38.4% YoY to MYR76.6 mln. The plantationand restaurant operations outperformed. Higher production inMalaysia and PNG/SI boosted pretax profit for plantations toMYR206.3 mln (up 23.2% YoY), while outlet expansion, new productsand promotions lifted earnings for the restaurant businesses toMYR124.1 mln (up 20.6% YoY). The oleochemical and biodieselmanufacturing operations were hit by higher feedstock costs andweaker prices - cumulative pretax loss from these operationsincreased to 6.5% YoY to MYR31.4 mln.
•
We cut our 2010 net profit estimate by 13.7% after factoring in theone-off provision and higher losses for the manufacturing division. Weraise net profit for 2011 by 10.7% after: (i) eliminating contributionsfrom NatOleo, and (ii) factoring in the recent upgrade in QSR Brands’(QSR MK, MYR4.38, Buy) earnings. We expect continued productiongrowth for the PNG/SI plantations due to increasing prime area andthe acquisition of CTP (PNG), which was completed in April 2010. Thiswill make up for the projected drop in Malaysian output (due toreplanting and lower yield). We expect palm oil prices to remain firmon good demand from both food and non-food sectors. Increasedconsumer spending and the planned opening of more new outletslocally and abroad will underpin growth for the restaurant businesses.
Recommendation & Investment Risks
•
We maintain our Buy call on Kulim and raise our 12-month target priceto MYR9.50 (from MYR8.50) following the 2011 earnings upgrade.
•
With the sale of NatOleo, Kulim will focus on the plantation andrestaurant businesses, which are more profitable and hold bettergrowth prospects, in our opinion.
•
We remain positive on the prospects of the plantation operations inPNG/SI, which is grouped under 50.7%-owned New Britain Palm Oil(NBPO LN, GBp567.50, Not Ranked), given the young plantationsthere. The inclusion of CTP estates expanded the group’s total plantedareas in PNG/SI by 26,215 ha (of which 25,000 ha are mature palms)to 75,122 ha. Operational changes at CTP are being undertaken toincrease efficiencies and this will contribute to future earnings growth.
•
The target price is derived from a PER-based sum-of-parts method.We assign a PER of 12x to plantation earnings and 6x-8x to the food &restaurant and other operations. The assigned PERs are at a discountto the current valuations of NBPO and QSR Brands, respectively.
•
Risks to our recommendation and target price include: (i) a delay incompleting the sale of NatOleo, (ii) palm oil price fluctuations, and (iii)a weak economy, which could affect consumer spending.
Key Stock Statistics
FY Dec.
20092010E
Reported EPS (sen)
47.265.4
PER (x)
18.113.1
Dividend/Share (sen)
15.015.0
NTA/Share (MYR)
7.788.59
Book Value/Share (MYR)
10.5811.45
No. of Outstanding Shares (mln)52-week Share Price Range (MYR)Major Shareholders:Johor Corporation* Stock deemed Shariah compliant by the Securities Commission.
312.47.10 - 8.55%52.1
Per Share Data
FY Dec.
2007200820092010E
Book Value (MYR)10.1210.5410.5811.45Cash Flow (sen)195.5174.3140.1159.1Reported Earnings (sen)150.9117.047.265.4Dividend (sen)15.015.015.015.0Payout Ratio (%)17.412.822.416.3PER (x)5.77.318.113.1P/Cash Flow (x)4.44.96.15.4P/Book Value (x)0.80.80.80.7Dividend Yield (%)1.81.81.81.8ROE (%)6.88.34.76.3Net Gearing (%)21.831.438.632.7
All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request.
Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 2 of 4
Kulim (Malaysia)
Recommendation:
BUY
Stock Code:
2003
Bloomberg:
KUL MK
Price:
MYR8.55
12-Month Target Price:
MYR9.50
Date:
September 2, 2010
FY Dec. / MYR mln
2Q102Q09% Change
Reported Revenue1,673.61,487.812.5Reported Operating Profit144.0111.329.4Depreciation & Amortization0.0-164.1NMNet Interest Income / (Expense)-21.3-13.953.9Reported Pre-tax Profit123.199.523.6Reported Net Profit14.730.9-52.6Reported Operating Margin (%)8.67.5-Reported Pre-tax Margin (%)7.46.7-Reported Net Margin (%)0.92.1-Source: Company data
Quarterly Performance
Profit & Loss
FY Dec. / MYR mln
2008 2009 2010E 2011E
Reported Revenue3,989.35,806.26,719.85,930.8Reported Operating Profit660.3582.4664.9791.2Depreciation & Amortization-171.7-287.0-294.5-306.8Net Interest Income / (Expense)-53.6-64.5-60.6-48.5Reported Pre-tax Profit667.9521.9608.3746.8Effective Tax Rate (%)21.232.628.628.0Reported Net Profit351.2145.8206.5282.4Reported Operating Margin (%)16.610.09.913.3Reported Pre-tax Margin (%)16.79.09.112.6Reported Net Margin (%)8.82.53.14.8Source: Company data, S&P Equity Research
Required Disclosures
Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 3 of 4
Standard & Poor’s Equity Research Services
Standard & Poor’s Equity Research Services U.S. includes Standard & Poor’sInvestment Advisory Services LLC; Standard & Poor’s Equity Research ServicesEurope includes Standard & Poor’s LLC- London; Standard & Poor’s EquityResearch Services Asia includes Standard & Poor’s LLC’s offices in Hong Kongand Singapore, Standard & Poor’s Malaysia Sdn Bhd, and Standard & Poor’sInformation Services (Australia) Pty Ltd.
GlossaryStrong Buy:
Total return is expected to outperform the total return of the KLCI orKL Emas Index respectively, by a wide margin over the coming 12 months, withshares rising in price on an absolute basis.
Buy:
Total return is expected to outperform the total return of the KLCI or KL EmasIndex respectively, over the coming 12 months, with shares rising in price on anabsolute basis.
Hold:
Total return is expected to closely approximate the total return of the KLCI orKL Emas Index respectively, over the coming 12 months with shares generallyrising in price on an absolute basis.
Sell:
Total return is expected to underperform the total return of the KLCI or KLEmas Index respectively, over the coming 12 months and share price is notanticipated to show a gain.
Strong Sell:
Total return is expected to underperform the total return of the KLCI orKL Emas Index respectively, over the coming 12 months by a wide margin, withshares falling in price on an absolute basis.
S&P 12 Month Target Price
– The S&P equity analyst’s projection of the marketprice a given security will command 12 months hence, based on a combination ofintrinsic, relative, and private market valuation metrics.
Shariah-compliant stock -
As defined by the Shariah Advisory Council ofMalaysia’s Securities Commission
Required DisclosuresAll of the views expressed in this research report accurately reflect theresearch analyst's personal views regarding any and all of the subjectsecurities or issuers. No part of analyst compensation was, is, or will be,directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.Additional information is available upon request.Other Disclosures
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CMDF-Bursa Research Scheme (“CBRS”)
This report has been prepared by S&PM for purposes of CBRS administered byBursa Malaysia Berhad, independent from any influence from CBRS or the subjectcompany. S&P will receive total compensation of RM15,000 each year for eachcompany covered by it under CBRS. For more information about CBRS, pleasevisit Bursa Malaysia’s website at:http://www.bursamalaysia.com/website/bm/
Disclaimers
This material is based upon information that we consider to be reliable, but neitherS&P nor its affiliates warrant its completeness, accuracy or adequacy and it shouldnot be relied upon as such. With respect to reports issued to clients in Japan and inthe case of inconsistencies between the English and Japanese version of a report,the English version prevails. With respect to reports issued to clients in Germanyand in the case of inconsistencies between the English and German version of areport, the English version prevails. Neither S&P nor its affiliates guarantee theaccuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.Neither S&P nor its affiliates are responsible for any errors or omissions or forresults obtained from the use of this information. Past performance is notnecessarily indicative of future results.This material is not intended as an offer or solicitation for the purchase or sale ofany security or other financial instrument. Securities, financial instruments orstrategies mentioned herein may not be suitable for all investors. Any opinionsexpressed herein are given in good faith, are subject to change without notice, andare only correct as of the stated date of their issue. Prices, values, or income fromany securities or investments mentioned in this report may fall against the interestsof the investor and the investor may get back less than the amount invested. Wherean investment is described as being likely to yield income, please note that theamount of income that the investor will receive from such an investment mayfluctuate. Where an investment or security is denominated in a different currency tothe investor’s currency of reference, changes in rates of exchange may have anadverse effect on the value, price or income of or from that investment to theinvestor. The information contained in this report does not constitute advice on thetax consequences of making any particular investment decision. This material is notintended for any specific investor and does not take into account your particularinvestment objectives, financial situations or needs and is not intended as arecommendation of particular securities, financial instruments or strategies to you.Before acting on any recommendation in this material, you should consider whetherit is suitable for your particular circumstances and, if necessary, seek professionaladvice.For residents of the U.K. This report is only directed at and should only be relied onby persons outside of the United Kingdom or persons who are inside the UnitedKingdom and who have professional experience in matters relating to investmentsor who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to(d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order2005, respectively.For residents of Singapore - Anything herein that may be construed as arecommendation is intended for general circulation and does not take into accountthe specific investment objectives, financial situation or particular needs of anyparticular person. Advice should be sought from a financial adviser regarding thesuitability of an investment, taking into account the specific investment objectives,financial situation or particular needs of any person in receipt of therecommendation, before the person makes a commitment to purchase theinvestment product.For residents of Malaysia. All queries in relation to this report should be referred toAlexander Chia, Desmond Ch’ng or Ching Wah Tam.
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