This article first appeared in The Edge Financial Daily, on November 9, 2015.

Kulim (Malaysia) Bhd
(Nov 6, RM3.87)
Maintain buy with a target price (TP) of RM4.10: Kulim (Malaysia) Bhd’s (Kulim) controlling shareholder Johor Corp (JCorp), which holds a 61.87% stake, has informed the company of its intention to privatise it.

Entitled shareholders are expected to receive an estimated capital repayment of RM2.2 billion in cash or RM4.10 per Kulim share. 

Entitled shareholders are basically any shareholder other than JCorp or its affiliated companies. Entitled shareholders need to accept the offer by Nov 20.

JCorp cited a lack of immediate catalyst for Kulim’s stock price as its oil exploration foray may take longer than expected. Nevertheless, we believe there is value to be unlocked by JCorp over the longer term.

Potential value boosters for Kulim include: i) a potentially valuable oil find in its oil exploration venture; ii) steady improvement in its palm oil yield given that its age profile is now at its best ever; and iii) US tech giant Microsoft setting up operations in Sedenak, Johor, where Kulim has around 4,554ha of land.

However, none of these are likely to push Kulim’s stock price to RM4.10 over the next 12 months.

The privatisation is subject to conditions such as: i) 50% approval from entitled shareholders at its extraordinary general meeting with 75% in value; ii) must not be voted against by >10% of entitled shareholders; and iii) other regulatory approvals.

We believe the privatisation attempt is likely to be successful given the generous price offered, which is 24% above its last closing price. 

The offer price has also taken into consideration the promised special dividend of an estimated 37 sen from the sale of New Britain Palm Oil Ltd (NBPOL). That said, Kulim has around 16% institutional shareholding, which collectively could block the privatisation exercise.

We view the privatisation offer price as generous, being some 9.6% above the TP and factoring in the second tranche of its special dividend from the sale of NBPOL. — RHB Research, Nov 6