20080520 research

filed: KulimNew Britain buys Ramu Agri osk.pdf ,080520-kulim.pdf 


New Britain buys Ramu Agri Industries
Kulim’s 50.5% subsidiary New Britain Palm Oil, which is listed on the London Stock Exchange, made a US$43.8m cash offer for all of Ramu Agri Industries Ltd shares which it does not own. In addition, Ramu has net debt of US$13.7m. Ramu is listed on the Papua New Guinea’s Port Moresby Exchange and holds long term leases of approximately 30,000 hectares in Ramu Valley, Papua New Guinea, of which New Britain believes 16,000 hectares has the potential of being developed into oil palm plantation.
Existingly, New Britain holds 19.45% stake in Ramu Industries. The acquisition will be funded from New Britian’s cash reserve.

COMMENTS
Purchase price inexpensive. Including Ramu’s net debt of US$13.7m, the purchase price comes to US$57.5m or RM184m (assuming US$1 = RM3.20). Attaching no value to its 8,000 hectares of sugar cane plantation and 16k heads of cattles and knocking off unplanted area of 16,000 at RM5 per hectare and mill at RM25m, the effective price for the 4,500 hectares of planted area is RM35.3k per hectare. This is quite close with the price IOI Corp recently paid in an acquisition for plantation asset in Sarawak. In terms of yield however, we believe its yield will be substantially higher than.

Consistent with company’s stated objective. New Britain targets to double its planted area in 7 – 8 years. The acquisition will bring the company substantially nearer to its objective.

News may not excite Kulim’s stock price. While New Britain’s stock price rose by 10% on Friday following the release of the acquisition news, Kulim’s stock price may not act the same way, At the moment, New Britain’s market cap stands at 817.6m sterling pound. Kulim’s 50.5% stake is thus worth RM2.6bn compared to Kulim’s own market cap of just under RM2.6bn, making Kulim’s stock clearly undervalued. However, we do not think New Britain’s acquisition news will act as a stock price catalyst for Kulim. This is because Kulim has been undervalued for some time vis-à-vis New Britain’s value.
New Britain is thus clearly not what is holding back Kulim’s stock price. Rather, we believe its Malaysia plantation holds the key. Once the market is convinced that its Malaysia plantation has turned profitable and no longer bogged down by its forward sale, the stock price should perform better. We remain convinced that Kulim will be a sector outperformer this year. Investors should look out for Kulim’s quarterly results to be released at the end of the month.

Summary
Kulim announced that its 51%-subsidiary NBPOL has offered to privatize Ramu Agri-Industries for USD44m. We think the deal is cheap (normalized 9x PE, vacant land value of USD1,800/ha) and transformative. Kulim remains our top pick in the plantation sector: 1) the stock trades at a FY08 PE of 8x vs. 14x for mid-cap peers; (2) Room for corporate action gains, given lumpy low-performing assets (eg. QSR, Johor development land). We are neutral on the plantation sector, and advocate switching from IOI/KLK to small/mid-cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.


Expanding landbank via acquisition

News: NBPOL in USD44m M&A deal
Kulim’s 51%-subsidiary New Britain Palm Oil (NBPOL) has made an offer to privatize its 20%-associate Ramu Agri Industries (RAI) for USD44m (PGK121m). The offer price of PGK5.00 for RAI is a 12% premium to last week’s PGK4.46/share closing price.

Background: RAI is a sugarcane grower with excess land RAI is listed on the Port Moresby Stock Exchange, and is an agricultural conglomerate currently involved in sugar (FY3/07 production of 32,000mt), palm oil (4,500ha of young mature planted land), beef (25,000 cattle comprising
a 9% PNG market share), cashew (100ha planted). RAI plans to plant palm oil on 30,000ha long-term leased land on the PNG mainland. Based on FY3/06 and FY3/07 net profit of PGK14m and PGK5m, transaction PE is 9-25x. The sharp drop in profit was due to a -30% decline in sugar output, because of crop disease, weather and land disputes. However, RAI’s management was quoted in the press as saying it hopes to restore sugar output through a mix of
restructuring and outsourcing. RAI’s earnings are currently heavily dependent on sugarcane, with CPO playing a small, but growing part.
Analysis: Acquisition is cheap; Long-term strategic value
In our view: (1) By Malaysian standards, the acquisition is cheap, considering PNG’s high FFB yields. Ignoring RAI’s current sugar business, RAI’s M&A valuation of USD55m and 30,000ha vacant land works out to USD1,800/ha, vs. USD3,100/ha in Sarawak (from IOI’s recent transaction). (2) NBPOL can comfortably afford the deal, given Dec07 net cash of USD116m. (3) NBPOL’s potential palm oil landholding will rise from the current 45,000ha to 75,000ha, similar in size to mid-cap Malaysian planters, and providing the company with
critical mass relative to other London-listed plantation stocks.