21/12/2011 (The Star) - Kulim (M) Bhd will be one of the beneficiaries from the privatisation of QSR Brands Bhd and KFC Holdings (M) Bhd as it will be transformed into a pure plantation stock fetching higher valuations on the local bourse.

Kulim will become a plantation company once QSR and KFC are privatised as the latter two have been parked under Kulim when listed. Kulim currently effectively owns 53.9% of QSR while it is also an indirect shareholder of KFC Holdings for QSR owns a 50.9% stake in KFC.

Industry observers said that Kulim would likely be up for a rerating after the privatisation exercise by Johor Corp (JCorp) and CVC Capital Partners, the parties which proposed to privatise QSR and KFC receive the approval of 75% of their minority shareholders today.

Based on historical trends, investors and fund managers tend to give higher premiums for sole industry exposed companies.

Kulim is currently trading at cheaper valuations vis-a-vis its palm oil peers but this could change when the privatisation exercise is completed upon the approval of minority sharholders. The company is currently majority owned by its single largest shareholder JCorp with a 56% stake.

Anticipating changes, investors and fund managers alike have been buying into this stock. The stock had seen trading suspended on the day the privatisation proposal was made on Dec 14, 2011. The stock had surged to RM3.86 after trading resumed the next day.

The stock had risen by 8.13% to RM3.99 since the proposed deal was announced.

According to data by Bloomberg, Kulim is currently trading at 12 months trailing price to earnings ratio (PER) of 9 times while close peer, Kuala Lumpur Kepong Bhd, is trading at 14.85 times PER.

Kulim will lose contribution of its earnings from QSR once the latter is privatised.

According to Kulim's 2010 annual report, the company derives 72% of its profits before tax (PBT) from the plantations industry which has geographical exposure in Malaysia and its London-listed New Britain Palm Oil Ltd.

The remaining 28% of its profits before tax is contributed by its fast food chain restaurant businesses which include Pizza Hut, KFC and Ayamas and its entrepreneur ventures division.

Analysts were mixed on the short term prospects for Kulim given the reparking of these business entitites should it be privatised; however, over the medium to longer term they were more positive of the stock.

According to MIDF Research, the disposal of Kulim's food and restaurant business would reduce its FY2012 PBT forecast by 32% to RM685mil and its earnings per share (EPS) by 29% to 26 sen. This effectively means that at press time, the stock was trading at forward PERs of 15.3 times.

MIDF's analyst Jasmaliha Jaafar rated Kulim neutral with an unchanged target price of RM3.20 derived from an EPS for FY2012 of 8.7 times. However, Jasmaliha added in the report that there were expectations that the contribution from its plantation business would substantially increase in the “near future” given the positive contribution from its Papua New Guinea and Solomon Island estates.

Months before this privatisation was proposed, Kulim had also bought 13,687 hectares from JCorp for a total cash consideration of RM700mil. OSK said that the RM1.1bil that Kulim stood to receive from this proposed privatisation exercise would likely be paid back to itself via dividends.

Netting RM700mil from RM1.1bil, Kulim will end up with a cash surplus of RM400mil, which the management had indicated it may utilise to receive and to buy more plantation assets. OSK also highlighted that Kulim's net gearing at 50% appears to be on the high side for a plantation company.

Nevertheless, it kept its buy rating on the stock with an unchanged fair value of RM4.80 based on 12 times FY2012 earnings.