24.03.2012 (The Star) -  Kuala Lumpur Kepong Bhd's (KLK) plan to dispose its underperforming English retailing business of body and home products Crabtree & Evelyn for a one-off RM123mil gain, or about 11.5 sen per share is seen as a positive move among analysts.

The RM465mil cash proceeds from the disposal will now be redeployed towards its plans to raise some RM1bil in capital expenditure for its financial year ended Sep 30, 2012.

KLK, which is Malaysia's third largest palm oil company by size, has proposed to dispose its non-core retail business to Hong Kong's Khuan Choo International Ltd for US$155mil (or RM465mil) in cash, and expects a disposal gain of US$41mil (RM123mil).

KLK is disposing Crabtree & Evelyn at approximately 1.3 times price-to-book value and a historical price earnings ratio (PER) of 33 times.

KLK also announced the acquisition of 90% of PT Global Primatama Mandiri, which owns 7,400ha with planting permits in West Kalimantan for 10.8 billion ruppiah (RM3.6mil). The acquisition will enlarge the group's land bank by close to 3%. Currently some 56% of KL Kepong's 248,498ha of land is in Indonesia.

 
Good deal: Crabtree & Evelyn London store. CIMB Securities’ Ng says the business
does okay in Asia but isn’t doing well in America and Europe.

“This is a good price in our view. Crabtree & Evelyn generated RM23mil in earnings before tax and RM14mil in net profit for the group in financial year 2011.

“Its return on equity of 3.9% was well below the group's average core return on equity of 19%. The disposal is expected to be completed within three months,” says Maybank Research analyst Ong Chee Ting.

CIMB Securities plantation analyst Ivy Ng is positive on the move saying that the sale will lift its financial year 2012 earnings by 9% through a one-off gain but will have little impact on core earnings.

She is still maintaining her target price of RM19.36 and “underperform” rating as she feels valuations remain pricey.

On a 2011 calendar year price to book value basis, KLK is at about 3.34 times, versus Sime Darby Bhd which trades at 2.19 times and IOI Corp Bhd at 2.63 times.

“I think the business did okay in Asia, but wasn't doing well in America and Europe. It could be the high cost factor of the products,” says an analyst.

Meanwhile, Ng says she was not surprised by the proposed sale of Crabtree & Evelyn as the group has indicated its willingness to dispose off non-core assets to focus on its core businesses.

“The timing is a slight surprise as we expected the group to hold on to the business for a while longer to grow its earnings,” says Ng. She is positive on the sale as the group is getting a good price on all metrics, which was 33.7 times historical PER, 1.3 times price-to-net tangible asset and 0.7 times price-to-sales.

She adds that the PER for the assets is higher than the 25.3 times its peer, Hong Kong listed French based L'Occitance, is trading at. “We estimate that the disposal will have minimal impact on future earnings as the interest savings from the proceeds will offset the loss in income from Crabtree & Evelyn,” says Ng.

Currently, Crabtree & Evelyn accounts for only 1% of the group's sales and 0.8% of net earnings infinancial year 2011.

As for the Indonesian acquisition, Ng says that the price of RM545 per ha for the plantable land is fair and she is neutral on the deal.

Meanwhile, Ong says that for its RM1bil capital expenditure, KLK is taking advantage of Indonesia's export tax structure to expedite its downstream investments, with the construction of a 175,000 throughput per annum (tpa) fatty acid and 700,000 tpa refinery and fractionation plants in Dumai, Indonesia, which will start operations by mid-2013.

“Investments for two more refining plants are also under consideration. Coupled with its target of 8,000 to 10,000ha in new oil palm plantings for financial year 2012 and construction of three new palm oil mills and four biogas plants, we raise our financial year 2012 capital expenditure forecast to RM1bil from RM400mil,” says Ong.

As a result of this, Ong has adjusted his financial year 2013 and 2014 net profit by 1.7% and 7.8% respectively.

For its first quarter ended Dec 31, 2011, KLK achieved a 12.1% increase in net profit to RM340.99mil on the back of a 20.64% increase in revenue to RM2.92bil.

For its year ended Sep 30, 2011, KLK achieved RM1.57bil in net earnings, compared with RM1.01bil previously. Revenue increased 43.4% to RM10.74bil.

Crabtree & Evelyn is sold in more than 40 countries, with over 6,000 locations and 500 concept stores worldwide. It enjoys Superbrands status in the Singapore, the United Kingdom, Hong Kong, Malaysia, Australia and New Zealand.

The company was founded in 1972 in Cambridge, Massachusetts, by Cyrus Harvey. The first retail store was opened in 1977 by Stephen Miller in the Philadelphia area.

KLK bought into the company in 1996. While day-to-day operations are funded and managed by KLK, research and development and design are based in the United Kingdom and the United States.