Kulim by OSK

We are maintaining our BUY call on Kulim as well as our RM5.95 FV (cum special dividend of 93 sen). Although the 2Q results were weak, much was already made known when subsidiary New Britain released its results last week. We are keeping our forecast  unchanged on anticipation of a  strong pick-up  from  its  Malaysia plantations in 3Q. We are still waiting for QSR/KFC to call for an EGM relating to the sale of their business, which we expect to trigger a re-rating on the stock. We still  like Kulim’s  undemanding valuation at 11x FY13 earnings and unique geographical diversification. Seemingly below expectations. Kulim’s 2Q core earnings were flat q-o-q at RM48.1m. 

This brings its 1H core earnings to RM94.1m, which is weaker compared with our fullyear forecast ofRM367.7m and consensus’ estimate of RM396.0m. However, we expect 3Q earnings to pick up significantly, with contribution from newly acquired estates from Johor Corp. Weakness mainly due to New Britain. As we mentioned in our 24 Aug note, New Britain’s 1H net profit fell by half on abnormally heavy rainfall during its peak cropping season. This had affected harvesting and resulted in some crop loss. The heavy rainfall also delayed its sugarcane harvesting season, which was pushed into 2H. Malaysia  1H  production weaker. Kulim’s Malaysia  1H  FFB production was disappointing, coming in at 259,782 tonnes,  which was  8.3% lower than last year. However, its July production surged 18%, reflecting a  yield recovery and contribution from some 4,499 ha of planted areas, for which the acquisition was completed at end May. We believe 3Q will show  a  significant improvement in production and hence earnings. 

Very promising 2013. Kulim’s Malaysia plantation’s age profile is at its best since 2007,with 60% of the trees being in at the young and prime mature stage while the number of old and due trees are at their lowest since 2007 at 27%. These factors are supportive of very good production going forward. 

Maintaining forecast.  We are keeping our forecast, which  we  recently reduced, unchanged at RM367.7m for FY12 and RM487.1m for FY13.  Our CPO price assumptions stay at RM3,000 per tonne for CY12 and RM3,500 for CY13.