Kulim (M) Bhd
(June 2, RM2.60)
Maintain buy with target price (TP) of RM2.95: We believe there is value in Kulim . There is excessive pessimism about its oil exploration venture, the risk of which we believe is limited.

We maintain a “buy” call with a sum of parts-based TP (14% upside, plantation at 16 times 2016 earnings). 

Its break-up value is worth much more at RM3.66. This is conservatively assuming zero value for its oil exploration business, which is worth 19 sen per share if 10% of its reserve is recoverable.

On Feb 26, Kulim completed its disposal of 73.5 million shares in New Britain Palm Oil  at £7.15 (RM40.27) per share. Following the receipt of the proceeds, Kulim has paid out 37 sen in special dividends. The company has committed to another special dividend of the same quantum next year.

We believe the market is overly pessimistic about Kulim’s venture into oil exploration in Sumatra, Indonesia. We believe the risk to Kulim as a whole is very limited. 

Based on the terms of the exploration, the Indonesian government will compensate the company for all its expenses incurred. Should the whole venture fail, the maximum risk to Kulim is US$133 million (RM492.1 million), which is its equity stake in the venture.

In the first quarter of 2015 (1QFY15), Kulim posted a 5.4% year-on-year (y-o-y) decline in fresh fruit bunch (FFB) production likely due to excessive dryness in 1QFY14. This resulted in poor 1Q earnings performance. However, production is already recovering with a significant surge in April production, which brought its first four months’ production to a mere 0.7% decline. Management is expecting a 7% production growth this year.

Kulim’s age profile is at its best ever with 42% of trees in prime age, which will likely drive FFB yield to record levels in the next few years, barring any short-term production disruption from adverse weather.

We believe Kulim’s stock price has priced in the worst-case scenario in its oil exploration venture. 

The pessimism has created a bargain stock, which could turn surprise on the upside. — RHB Research, June 2

This article first appeared in The Edge Financial Daily, on June 3, 2015.