HOLD(unchanged)
Investment Highlights
Maintain Hold with unchanged RNAV-based target price of RM10.65/share. In spite of Kulim’s betterthan- expected 1QFY08 results and potential upside of 22% to our target price of RM10.65/share, we prefer more efficient and consistent players like IOI Corporation and Kuala Lumpur Kepong for exposure to the plantation sector.
Kulim’s 1QFY08 results exceeded our expectations and consensus estimates mainly because of a recovery in the Malaysian plantation division. Profitability of the division rebounded in 1QFY08 after being affected by floods in 1QFY07. Due to the floods, the oil palm estates in Malaysia faced lower FFB yields and higher infrastructure costs in 1QFY07.
We have raised FY08F net profit by 31% to account for higher-than-expected plantation EBIT margin. We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous assumption of 28% (FY07: 28.6%). Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 versus 24.2% in 1QFY07.
The PNG division was the key earnings driver of Kulim, accounting for more than half of group EBIT in 1QFY08. Although EBIT of the division nearly doubled YoY to RM121.7m in 1QFY08, interestingly, FFB output in PNG declined marginally by 3.7%. We attribute this to tree stress after bumper harvests in the past few years.
The quick service restaurants division also performed well, recording a 46.3% YoY increase in EBIT to RM26m in 1QFY08. The division’s improved performance is underpinned by new Pizza Hut outlets and products.
1QFY08 RESULTS ABOVE EXPECTATIONS
Kulim Bhd’s 1QFY08 results are above our expectations and consensus estimates. The group’s 1QFY08 net profit of RM98.2m accounted for 32% of our full-year forecast and 33% of consensus estimates. The discrepancy between our forecast and the actual results is due to higher-thanexpected plantation operating margin.
Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 against 24.2% in 1QFY07 and 53.9% in 4QFY07. Our assumption was 28% for FY08F (FY07: 28.6%). Kulim’s improved plantation EBIT margin in 1QFY08 can be attributed to higher CPO price and better performance from the Malaysian plantation operations.
Recovery in Malaysian plantation operations
EBIT of the Malaysian plantation division recovered from a mere RM3.2m in 1QFY07 to RM53.3m in 1QFY08 due to higher CPO price, increase in FFB yields and lower operating expenses. FFB output of the Malaysian estates expanded 34.9% YoY to 131,459 tonnes in 1QFY08 while average CPO price was 60% higher at RM2,641/tonne in 1QFY08 versus RM1,650/tonne in 1QFY07.
Recall that in 1QFY07, floods affected FFB yields of the Malaysian oil palm estates. The floods also damaged roads, which resulted in higher infrastructure and repair and maintenance expenses.
PNG division - driver of profits
The PNG division was the key driver of the group’s profits, accounting for 54% of group EBIT in 1QFY08. EBIT of the PNG division surged from RM65.5m in 1QFY07 to RM121.7m in 1QFY08. Profitability of the division was driven mainly by higher CPO prices. Average CPO price grew 63% YoY to US$954/tonne (RM2,957/tonne) in 1QFY08 compared to US$585/tonne (RM1,814/tonne) in 1QFY07.
Interestingly, FFB output of the PNG division declined 3.7% YoY to 197,218 tonnes in 1QFY08.
Profits of quick service restaurants division climbed 46.3% YoY to RM26m in 1QFY08
This is largely on the back of a 24.1% YoY expansion in turnover in 1QFY08. The higher turnover can be attributed to the opening of three new Pizza Hut outlets and new products such as the Sensasi Delight combo meals.
EBIT margin of the division improved from 17.1% in 1QFY07 to 20.2% in 1QFY08.
FY08F earnings revised up by 31%
We have revised Kulim’s FY08F net profit up by 31% to account for the better-than-expected plantation EBIT margin (please refer to Table 2). We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous forecast of 28%.
Despite the higher net profit forecast for FY08F, we are keeping our gross DPS forecast of 30 sen, which implies a yield of 3.4%.
HOLD RECOMMENDATION MAINTAINED
Our preferred exposure in the plantation sector are IOI Corporation and Kuala Lumpur Kepong Bhd. Kulim’s PNG plantation assets i.e. New Britain Palm Oil Ltd are listed on London Stock Exchange. Hence, for direct exposure to Kulim’s PNG assets, we reckon that investors should buy shares in NBPOL instead.
Going forward, we believe that the group could be facing cost pressures. Although margins for the plantation division should remain intact due to high CPO prices, the quick service restaurants division could face an erosion in operating margin because of increased material and overhead costs.
Kulim’s dividend yield of 3.4% for FY08F is in line with sector average while FY08F return on equity of 12.9% is decent enough.
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