After a series of privatisations and corporate exercises over the years, Johor Corp has four flagship stocks in its stable: Kulim (Malaysia) Bhd, KFC Holdings (Malaysia) Bhd (KFCH), QSR Brands Bhd and KPJ Healthcare Bhd.

Based on the current structure of JCorp’s group of companies, it directly owns 53.2% of Kulim and 48.35% of KPJ, which means it receives cash dividends from these two entities only (see chart).

JCorp privatised and delisted Johor Land Bhd in July 2009. It launched a conditional takeover of Damansara Realty Bhd early this year, but maintained its listing. It now has a stake of more than 53% in the company.

It is worth noting that as at Dec 31, 2009, the market capitalisation of JCorp’s listed subsidiaries stood at RM10.4 billion, which was a substantial increase of 51% from RM6.8 billion as at Dec 31, 2008.

KFCH, the jewel in the crown of the state corporation, is its best performer, having gained 122% YTD. QSR Brands, which is KFCH’s parent company, has risen 70% YTD.

Although JCorp does not have direct stakes in these two companies, it controls them via its 53.22%-owned and listed subsidiary Kulim Corp Bhd, which has gained 80% YTD.

KPJ Healthcare, which has risen 42% YTD, acts as an incubator for JCorp’s real estate investment trust (REIT) vehicle — Al-‘Aqar KPJ REIT — which manages almost RM1 billion worth of healthcare assets.

Interestingly, QSR Brands has been nibbling at Al-’Aqar KPJ REIT, with its latest purchase being 1.95 million units of the property trust for RM2.01 million.

JCorp’s acquisition via Kulim of a controlling stake in QSR Brands back in 2005 for RM280.13 million or RM3.20 a share changed the anatomy of the group.

In September 2006, QSR Brands launched a mandatory general offer (MGO) for KFCH but failed to reach an  acceptance level of above 50%. Thus, it now has a 42.9% stake in KFCH.

KFCH has been generating healthy cash flow of more than RM120 million a year, becoming the driving force of the group. Net operating cash flow was RM135.48 million in FY2008 ended Dec 31 and RM243.26 million in FY2009.

QSR Brands’ parent Kulim has also seen its market value rise significantly. The counter has gained 13% YTD.

It is worth noting that QSR Brands undertook a one-for-six rights issue in early 2008 while KFCH undertook a share split and bonus issue in August this year.

The question is, how long can the stocks in JCorp’s stable maintain their share price momentum? And with the change at the helm of JCorp, will different strategies come into play?

Not to be forgotten is the RM3.6 billion debt that JCorp needs to pay in 2012. To do this, the Johor state-owned entity may need to dispose of some assets.

A JCorp spokesman says the company is currently reviewing and evaluating various options to resolve its debt problem.

“JCorp has appointed a financial adviser for its proposed group-wide restructuring exercise mainly to address its financial obligation of RM3.6 billion due in July 2012.

“Any corporate exercise related to JCorp’s listed entities will be announced by the respective listed companies and will be subject to necessary regulatory and shareholder approvals,” the spokesman says in an email reply.

Recently, JCorp’s president and CEO Tan Sri Muhammad Ali Hashim vacated his post after close to three decades of serving the state corporation.
While it is learnt that Kamaruzzaman Abu Kassim, JCorp’s senior vice-president of finance and corporate services, is now the acting president and CEO, no firm decisions have been made yet on who will be the next JCorp chief.

One of the high-profile corporate exercises led by Muhammad Ali was the acquisition of QSR Brands. JCorp emerged triumphant after a protracted boardroom fight with parties that were said to be aligned to businessman Soh Chee Wen.

JCorp won the fight for QSR largely due to the support of the Employees Provident Fund (EPF). However, a year later, the EPF started to divest its interest in KFC.

It was reported that this was because the provident fund was not comfortable with the series of related-party transactions involving KFC.
Lembaga Tabung Haji (LTH) then emerged as a major institutional shareholder in KFC and now holds a 22.8% equity interest in the fast-food operator.

At the moment, the EPF holds less than 5% in QSR and about 6% in Kulim. It has about 8% equity interest in another JCorp-related counter — KPJ Healthcare Bhd.

It remains to be seen whether with a new captain at JCorp’s helm, these counters will attract more institutional investors.

What is for certain is that interest is growing in KFCH as evidenced by its share price performance of late.

The counter has gained 121% YTD and reached its highest level of RM4.62 since its listing in 1988 last Wednesday. However, it retraced to a lower level of RM4.16 at the closing bell last Friday.

The possibility that KFCH might be privatised, among other news reports, was instrumental in sending its share price upwards.

Although KFCH lags behind its peers in terms of liquidity (based on an estimated free float of 21%) and dividends, it certainly has been delivering high return on equity (ROE) to its shareholders, for example 16% in FY2009. In a recent note, Maybank IB estimates that KFCH’s ROE will continue to be above this level at least for the next three financial years.

It is worth noting that the research house estimates the growth rate of KFCH’s shareholders’ funds and net profit to be in the mid teens from FY2009 to FY2012. Net profit in FY2009 was RM130.4 million while shareholders’ funds stood at about RM792 million.

Possible monetisation of KFCH?
For now, it appears that JCorp has the right assets in the food business. The plantation and quick-service restaurant segments remain JCorp’s largest revenue contributors as both businesses are resilient, based on their financial performance so far.

In FY2009 ended Dec 31, Kulim recorded RM8.19 billion in revenue, of which 35% or RM2.89 billion was from its plantation business. Net profit stood at RM446 million while cash stood at over RM520 million.

However, JCorp must gear down to be able to undertake any corporate exercise in the near future. The debt it incurred during the 1997/98 Asian financial crisis is still hanging over the group.

In 1998, debt stood at more than RM10 billion and JCorp had to enlist the help of the Corporate Debt Restructuring Committee (CDRC) to help it fend off its creditors. JCorp managed to restructure its debt and a big repayment of RM3.6 billion is due in 2012. To pay up, JCorp is expected to dispose of some of its assets, which were worth RM13 billion as at Dec 31, 2009. Among the assets are quoted securities worth some RM6 billion.

Interestingly, OSK Research says in a recent note that Kulim’s break-up value of RM3.84 billion is close to the sum JCorp needs to clear its debt.

“With all its listed assets doing well operationally and in terms of stock price, JCorp is spoilt for choice as to which asset to sell to meet its debt obligation if it is unable to refinance its bonds,” says OSK Research.

Kulim has also been selling its assets to raise funds to help lower its gearing over the last few months. In March, it proposed to sell Menara Ansar in Johor Baru to Al-’Aqar KPJ REIT for RM105 million — RM63 million in cash and the balance in REIT units. The cash will be used to settle bank borrowings.

Kulim’s biggest disposal so far has been the divestment of its 91.4% stake in NatOleo for RM450 million cash. The company still has a few listed subsidiaries, including its 77%-owned Sindora Bhd, which generated revenue of RM336.58 million and net profit of RM45.5 million in FY2009.

Kulim also owns a 50.7% stake in London-listed New Britain Palm Oil Ltd, which has gained 107% YTD and reached its six-month high of 845 pence last Thursday.

It will not come as a surprise if other assets in JCorp, including KFCH, were to come up for sale as they can be easily monetised. But what kind of premium will they fetch?

As it is, some say KFCH deserves a better valuation than what it fetches today. Maybank IB says at its discounted cash flow-based target price of RM3.58, KFCH should be trading at 16.5 times 2011 price-earnings ratio.

While this is at the high end of its historical trading valuations, Maybank IB believes the richer valuation is justified given KFCH’s highly recognisable brand name and the strength of its franchise.

Certainly, it will be a costly affair for any party to buy KFCH. Based on the counter’s closing price of RM4.16 last Friday, QSR Brands’ 50.64% stake in KFCH is worth RM1.67 billion. LTH’s 22.8% stake, meanwhile, is worth some RM752 million.

Given JCorp’s need for funds to clear its debt, it is uncertain at what kind of discount it will be willing to part with its investment in KFCH.

Apart from the disposal of assets, there is speculation of a possible bumper dividend from Kulim so that more cash can flow into JCorp to help part-finance its needs.

Clearly, JCorp has many tasks at hand, including finding ways to repay its debt obligation without diluting value and enhancing the worth of its listed entities.

This article appeared in Cover Story page, The Edge Malaysia, Issue 832, Nov 15-21, 2010