12-Month Target Price: MYR2.82
Date: August 29, 2008
STRONG BUY
Market Value - Total: MYR211.7 mln
Analyst: Alexander Chia, ACA
Summary: Kurnia Setia (Kurnia) is a small plantation group with 10,859ha of oil palm estate in Pahang. It has also ventured into property development on a 607ha-site in Kuantan with an estimated GDV of MYR1.8 bln.
Highlights
Kurnia is expected to achieve bumper profits in 2008 and 2009 on the back of strong FFB production and higher CPO prices. FFB production has risen by 36.2% in the first seven months of 2008, following the adoption of best plantation practices to improve production and enhance efficiency under the new management. FFB yield for the year is expected to increase to 20.5 tons/ha from 14.6 tons/ha five years ago.
Going forward, growth will come from the development of the newly acquired 3,035ha Kuala Lipis estate, the replanting exercise on its existing estates and the commissioning of milling operations in 2010. It also plans to enlarge its landbank further and its links with the Pahang state government will help in scouting for more plantation land in the future.
A longer-term driver for earnings will come from the 607ha Seri Kurnia Mahkota township development in Kuantan, which will have a gross development value (GDV) of MYR1.8 bln over a 10-15 year period. Meaningful earnings contribution is expected only from 2010.
Risks to our recommendation and target price include a lower-thanexpected CPO price, a drastic improvement in weather condition, a higher windfall tax for plantations, further delays in the launch of its property project and the lack of liquidity in the stock.
Recommendation
S&P Equity Research initiates coverage on Kurnia with a Strong Buy recommendation and a 12-month target price of MYR2.82
Our DCF-derived target price assumes a WACC of 10.2%, risk free rates of 4.0%-5.5% and terminal growth of 2%. We have also assumed an average CPO price of MYR3,200 per ton for 2008, MYR3,000 for 2009 and a long-term CPO price of MYR2,500/ton. The valuation is based on a fully diluted basis assuming full conversion of the warrants
At MYR2.10, the stock trades at PER of 3.6x for both 2008 and 2009, which is at the lower end of the forward multiples of between 3.2x and 9.3x for small- to medium-sized plantation stocks
There has been notable improvement in the plantation management and financials of the group under the new management. The link with the Pahang state government could also enable the group to secure more plantation land at reasonable prices going forward. Kurnia does not have a formal dividend policy. We have forecast a gross dividend of 12.0 sen for 2008, which translates to an attractive gross yield of 5.6%
From a Corporate Social Responsibility perspective, we note that Kurnia has been promoting zero burning and preservation of ecosystems within its estates. It has also contributed to schools in the vicinity of its estates.
Background
Corporate Profile
Kurnia is essentially a small plantation group with an oil palm plantation of 10,859ha in Pahang. The company started off with 607ha of plantation land in Kuantan, and subsequently increased its land bank to its present size. It was listed on the Main Board of Bursa in 1991.
The Pahang royal family emerged in 2005 when it acquired a block of shares via TAS Kurnia Group from Lembaga Kemajuan Pertanian Pahang (LKPP, or Pahang Agricultural Development Corp), a state government agency for MYR1.88 share (adjusted for 1-for-3 rights issue). Subsequently a new management team was put in place, led by chief operating officer YM Tengku Dato’ Zubir bin Tengku Dato’ Ubaidillah (former general manager of Road Builder Holdings) and executive director YM Tengku Dato’ Uzir bin Tengku Dato’ Ubaidillah (former executive director of Road Builder Holdings). TAS Kurnia currently owns 29% stake in Kurnia.
LKPP is still a substantial shareholder with a 23.0% stake. LKPP also has a 6.1% stake in Far East Holdings (FEH MK, MYR6.80, Not Ranked), while the Pahang state government has a 69.6% stake in Mentiga Corporation (MENT MK, MYR0.725, Not Ranked).
Corporate Structure
Alur Gemilang 60%
Kurnia Setia Development 100% -> Kurnia Setia Trading 100%
* Only active subsidiaries are shown
Business
Plantation Division
Kurnia owns 14,832 ha of plantation land in Pahang including the 3,035 ha vacant land in Kuala Lipis which it acquired for MYR11.2 mln from the Pahang state government in November 2007. The estates are located in undulating to hilly terrain, which is suitable for oil palm plantations. Of the 10,859 ha planted with oil palm, 95% is mature with 73% in the prime age of between 4-15 years.
As Kurnia does not own a palm oil mill, it sells its fresh fruit bunches (FFB) to Felda and other private mill owners at an average monthly spot price as announced by the Malaysian Palm Oil Board. Hence, there is no forward selling of CPO.
There has been notable improvement in the plantation management since the new management came into place, following the adoption of good estate management practices. This includes improved planting methods, more efficient harvesting and collection and tightened security to reduce pilferage, among others. As a result, FFB yield per ha rose to 18.7 tons in 2007 from only 14.6 tons in 2005. Its flagship Klau estate near Raub achieved a yield of 24 tons, and management is trying to replicate that level in other estates.
Yield per ha is expected to be above 20 tons in 2008 based on our estimation, compared with an average yield of 17.6 tons for peninsular plantations in 2007. Similarly, the crude palm oil extraction rate has risen to 19.5% from 18.9% during the same period. This was slightly above the average of 19.1% for peninsular mills.
Its long-term plan is to expand its planted area and it is pursuing negotiations with state governments either for the outright purchase of landbank or on a JV basis. This is in line with its objective of becoming a sizeable plantation player in Malaysia. The link with the Pahang state government could enable Kurnia to acquire land bank at reasonable prices.
The immediate plan is to begin planting on its 3,035 ha Kuala Lipis land in October this year over a three-year period. The plan will require capex of MYR33 mln. On top of this, Kurnia also plans to move into downstream operations by venturing into milling operations in 2010 via a 51:49 JV with LKPP for MYR30 mln. The initial capacity is 30 tons/hour and there will be no problem in terms of sourcing of FFB as Kurnia, LKPP and related companies will have over 30,000 ha of oil palm plantation by then within the Kuala Lipis vicinity.
comment by author: it must be a joke made by S&P,please keep pace the SOP bonus share and rights share proceeding, hence, this is not a feasible comparison.
Property development
Kurnia plans to develop 607ha of former plantation land in Bukit Goh, which is 10km from Kuantan town into the Seri Kurnia Mahkota integrated township. The development will have a gross development value (GDV) of MYR1.8 bln and will be developed over a 10-15 year period in seven development phases. The development is located within the Eastern Corridor Economic Region (ECER) and is in close proximity to the East Coast Expressway and Kuantan-Kemaman bypass road. In addition, it is situated within the Chenor-Gebeng petrochemical industries corridor. Land cost was low at merely MYR28 mln or 43 sen psf. This will enable Kurnia to price its products competitively. Phase 1 of the development covering an area of 100ha (comprising 1,200 mixed housing and commercial units worth MYR330 mln will be launched in early 2009, instead of early 2008 as originally scheduled. The new township has the potential to become the state government administrative center which will help to accelerate development in the area.
Earnings Outlook
Kurnia posted a net profit of MYR31.9 mln in 2007 from MYR8.9 mln in 2006, on the back of increased FFB production and higher CPO prices. Its FFB production jumped by 9.8% to 180,068 tons, driven by higher FFB yield of 18.7 tons per ha from 16.5 tons per ha previously, while oil extraction rate rose to 19.3% from 18.5% a year ago. It also achieved a higher CPO price of MYR2,533 per ton, an increase of 68.1% from MYR1,507 per ton in the preceding year.
YTD average CPO price for the spot market is at RM3,363 per ton, and we have assumed an average price of MYR3,200 for this year to take into account the recent fall in CPO prices. The spot price has corrected by 28.2% to the low of MYR2,379 per ton in August from the peak of MYR3,423 in March 2008, triggered by the fall in crude oil prices following the unwinding of speculative trading. We expect prices to recover in 4Q08 on lower inventories. This is in view of seasonally stronger exports of palm oil in 4Q and the low production period in 1Q.
For 2009, we have assumed an average CPO price of MYR3,000 per ton. This is in view of the tight global supply of edible oils, which we believe will provide some downside support to the palm oil price. In addition, the recent fall in CPO prices will also spur demand. Another crucial factor which may affect demand growth will be the possibility of the EU reviewing its ambitious biofuel target (of 10% of all transport fuel from renewable sources by 2020).
We expect Kurnia to achieve a net profit of MYR60.5 mln in 2008 and MYR60.6 mln on higher CPO prices and strong FFB output. Our forecasts have taken into account the rise in production costs, in particular the increase in fertilizer and herbicide prices. Prices of fertilizer are believed to have risen to about MYR1,800-MYR1,900 per ton currently from below MYR1,300-MYR1,400 per ton in early 2008, but fortunately, Kurnia had locked in its fertilizer requirements at MYR15 mln for 2008, as compared with MYR9 mln in 2007.For the property development, we have assumed it will launch its phase one and phase two of development worth MYR630 mln only in 2009 and 2010 respectively. Earnings are expected to be negligible in 2009, but meaningful contribution of MYR6.3 mln is expected for 2010.
Kurnia does not have a formal dividend policy. We have forecast that it will be able to declare a gross dividend of 12.0 sen for 2008. This will translate into an attractive yield of 5.6%.
Capex requirements for the next two years is estimated at MYR50 mln, mainly for the development of Kuala Lipis estate, its replanting exercise and the development works for the Seri Kurnia Mahkota township. Part of the funding will come from the 1-for-3 rights issue at MYR1.50 a share with one free warrant attached (completed April 2008). The net proceeds of MYR36.9 mln from the exercise would be for the development of Kuala Lipis estate (MYR15 mln) and the Seri Kurnia Mahkota township (MYR15 mln), as well as for working capital purposes (MYR6.9 mln).
remark by blogger: please keep pace with SOP rights issue and bonus issue proceeding, hence this is not a feasible comparison.
Valuation
We value Kurnia at MYR2.82 a share derived from a DCF estimate based on the following assumptions: (i) long-term CPO price of MYR2,500/ton and (ii) a WACC of between 9.4% and 10.6%. The valuation is derived based on fully diluted basis upon full conversion of the 25.3 mln warrant issue.
The stock currently trades at 3.6x our projected earnings for 2009. This is at the low-end of the forward multiples of between 3.2x to 9.3x for smallto medium-sized plantation stocks. We therefore have a Strong Buy call on the stock.
Recent Developments
April 2008: Kurnia completed a 1-for-3 rights issue at MYR1.50 a share which came with one free attached warrant, raising net proceeds of MYR36.9 mln.
January 2008: Kurnia accepted an Islamic loan facility of MYR30.0 mln from Maybank.
November 2007: Kurnia entered into a Sale and Purchase Agreement (S&P) with LKPP for the acquisition of 3,035ha of state land in Kuala Lipis for MYR3.4 mln. It also signed a Management Agreement with LKPP to develop and manage 181ha of oil palm estate in Lipis, Pahang for 25 years. It also entered into a Memorandum of Understanding (MOU) with LKPP to jointly built, operate and manage a palm oil processing mill in Lipis.
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