BY TEE LIN SAY
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WHAT does the partial offer for shares of London-listed New Britain Palm Oil Ltd (NBPOL) mean for the offerer, namely Kulim (M) Bhd?
Kulim has said that the NBPOL deal, coupled with Kulim’s divestment last year of its stake in QSR Brands Bhd, will make Kulim a pure plantation player.
Once the exercise is completed, Kulim would have raised its stake in NBPOL by 20% to 68.97%, thereby allowing Kulim to fully consolidate the earnings of NBPOL.
Kulim used to own 80% of NBPOL. Kulim first became a shareholder of the company in 1996 with an 80% equity interest when the Papua New Guinea (PNG) government privatised its investment in NBPOL.
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Kulim had to gradually sell down its stake in NBPOL to fulfil its commitment to the PNG government.
Then in 2007, it announced that it was selling a 10% NBPOL stake to Singapore’s Pacific Rim Plantation Services Pte Ltd at 96 million kina (RM107.67mil) cash.
So currently, NBPOL is a 48.97% associate company of Kulim, and is involved in cultivating and processing palm oil. While NBPOL has some 78,000ha compared to Kulim’s 91,000ha plantation in Malaysia, it is NBPOL which is delivering some 70% of Kulim’s earnings.
NBPOL had historically contributed significantly to the group’s plantation. In 2012, 71.2% of the total crude palm oil production was contributed by the operations in PNG and Solomons Island, which operate under NBPOL Group.
Yields and oil extraction rates in NBPOL are also substantially higher than the Malaysian plantation operations.
The combined hectarage of Kulim and NBPOL is 147,772ha, making it the sixth biggest among Bursa Malaysia-listed plantation companies
On Thursday, Kulim announced it was partially acquiring up to 30 million shares in NBPOL at £5.50 (RM27.24) per offer share with a total consideration of £165.05mil (RM812.3mil) to be satisfied fully in cash.
This represents a price-to-book ratio of about 1.31 times, taking into account NBPOL’s net assets of some £4.18 per share.
NBPOL’s share price reacted to this news by appreciating 11.41% to £5.12 (RM25.34) over the week. Meanwhile, Kulim’s share price barely budged and stood at the RM3.46 level.
Analysts say this is partially because the move has already been anticipated, and Kulim is also assuming debt to take up the stake.
An MIDF analyst says the proposed acquisition is expected to be funded by a combination of cash and bank borrowings. The likelihood is that more than 70% of the purchase consideration will be funded by bank borrowings as the cash position of the group as at end-2012 was only RM222mil.
This will increase the current net gearing ratio of Kulim from 0.17 to 0.46 times, which is higher than the net gearing ratios of Genting Plantations and KL Kepong,” says the MIDF analyst.
According to NBPOL’s website, it has over 78,000ha of oil palm plantations, a further 10,000ha under preparation for oil palm, over 7,700ha of sugar cane and a further 9,200ha of grazing pasture, 12 oil mills, two refineries – one in PNG and one in Liverpool, UK – as well as a seed production and plant breeding facility.
Earnings jump
As the proposed acquisition is expected to be completed in the second half of 2013, Kulim’s earnings should be jolted this year onwards. Consensus earnings estimate onBloomberg for NBPOL is US$53.55mil (RM166mil) and US$96.85mil (RM300.23mil) for its financial years ended Dec 31, 2013 and 2014 respectively.
Based on these assumptions, an MIDF Research analyst expects Kulim’s earnings per share in 2013 and 2014 to increase by 14.4% and 14% respectively.
Alvin Tai, a plantation analyst in RHB Research is positive on the move, and he sees Kulim’s 2014 earnings potentially being boosted by 8%.
Tai believes it is an opportune time for Kulim to raise its stake in NBPOL as management has indicated several years ago that it will raise its NBPOL stake at the right price.
“However, NBPOL’s stock price had stayed persistently high over the past few years, making it expensive for Kulim to raise its stake in the company. Since last year, NBPOL’s stock price has suffered as its earnings plunged due to unusually heavy rainfall. As the weather effect is temporary, this creates an opportunity for Kulim to buy cheaply,” said Tai.
MIDF maintains its “neutral” call on the stock due to several negative factors, for example subdued CPO price and lower oil extraction rate in the Malaysian operations.
“We expect earnings performance for the current financial year to be muted.”
Since the divestment of its restaurant business in early 2013, Kulim has made known its intentions to make plantation its core business.
For the first quarter to March 31, 2013, Kulim’s net profit jumped 402.92% to RM345.53mil on the back of a 23.92% increase in revenue to RM258.86mil. Some RM339.15mil of profits were derived from its discontinued operations which were due to Kulim disposing of its stakes in QSR Brands Bhd and KFC Holdings (M) Bhd.
Last year, a consortium comprising Johor Corp (JCorp), the Employees Provident Fund and CVC Capital Partners took QSR Brands and KFC Holdings private for RM5bil. Prior to the sale, Kulim had a 58.63% interest in QSR, which in turn owned 51% of KFCH. JCorp has a 55.1% stake in Kulim. This exercise was completed in January 2013.
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