Good times, better times

Malaysian Business, Jun 16, 2008 by Johannes Ridu

LAST MONTH, KULIM (M) BHD'S plan to buy the remaining 28.96% of Sindora Bhd shares hit a snag after the latter's independent adviser, Affin Investment Bank Bhd, said the offer price of RM1.72 per share was too low. Affin asked Sindora's minority shareholders to reject Kulim's offer.

Affin asserted that it would be better for the shareholders to retain their shares as the group's profitability had been on an increasing trend from 2003 to 2007, except for 2005.

In a circular to shareholders, Affin also stated that `the offer price may not be fully reflective of the inherent value of Sindora Group assets and its prospects'.

It also said that the offer price translated into a net price- earnings multiple of 9.13x, which is lower than the average 9.26x of comparable companies.

The investment bank said that Sindora's plantation assets had a market value of RM201 million, or RM81.2 million above the book value of RM119.8 million.

But is Affin's recommendation relevant now? Since the so-called snag, Sindora shares have risen by as much as 31% to RM2.27 in early June.

`Asking Sindora's minority shareholders to reject Kulim's offer to buy at RM1.72 per share today is a no brainer ... the snag is a non-event," says Alvin Tai, an analyst at OSK Research Sdn Bhd.

Tai pointed out that Kulim had already acquired a 62% stake in Sindora from parent company Johor Corporation at RM1.72 per share in April. Kulim is therefore already `firmly in the driver's seat' and does not need to buy the remaining shares in Sindora at a price higher than RM1.72 per share.

However, Kulim's chairman Tan Sri Muhammad Ali Hashim said on May 27 that the company would have no problem buying the rest of Sindora's shares it does not own. `The transaction will go as planned,' he said, and added that the acquisition of Sindora would add synergy to Kulim's existing activities and diversify Sindora's earning base.

What are the benefits of the acquisition to Kulim? The acquisition not only boosts Kulim's plantation landbank by 20% to 37,773ha, but also increases the milling capacity from two to three palm oil mills.

`In fact, Kulim, via its subsidiary, EPA Management Sdn Bhd, now manages Sindora's existing oil palm plantations in addition to Kulim's plantations in Johor. Sindora's plantation activities are therefore easily integrated into Kulim's plantation operations,' Inter-Pacific Research said in a recent report.

Besides plantations, Sindora has also ventured into `Intrapreneur Ventures', a concept business that acquires profitable and growth companies driven by intrapreneur managers from diverse backgrounds. It currently has 10 companies with a total investment cost of RM90 million.

Inter-Pacific added that Sindora's revenue and net profit is expected to bring about RM11 million to Kulim's earnings in financial year 2008. However, net debt will increase from 22% to 29%, post acquisition.

Sindora also owns a 71.2% stake in JPM, a trading company for baby products, scientific equipment, and other related business.

Background

Kulim, which was struggling with forward sale and weather disruption last year, nearly tripled its profit in its first quarter ended March 31, from a year earlier, to RM98.19 million, for financial year 2008. The company is principally involved in plantation activities, with landbanks in Papua New Guinea (49%), Malaysia (42%) and Solomon Islands (9%).

Apart from plantations, the company is also exposed to the fast- food business via a 57% stake in QSR, which in turn holds 46.8% of KFC Holdings (M) Bhd and 100% of Pizza Hut Holdings Sdn Bhd.

Kulim further expanded into downstream activities, manufacturing palm oil products via its 91% stake in Natural Oleochemicals Sdn Bhd, which produces fatty acids and glycerine, oleic acids, esters, soap, noodles and palm wax.

In view of rising crude oil prices, and the viability of biodiesel as an alternative energy source, Kulim ventured into biodiesel production through its joint venture with Peter Cremer (Singapore) GmBH. They set up two biodiesel plants in Tanjung Langsat, Johor, and in Jurong, Singapore, which were completed in the third quarter of 2007.

Plantations

The oil palm plantation division is Kulim's key earnings driver and accounted for about 42% of the group's total revenue and 74% of its operating income during financial year 2007.

Kulim's plantation activities has a total plantation landbank of about 83,712ha in Malaysia, Papua New Guinea and the Solomon Islands. Kulim's plantation yield of fresh fruit bunches (FFB) is above the industry average, and its oil extraction rate (OER) and palm kernel extraction rate (KER) are improving year-on-year.

Manufacturing

Kulim is involved in the manufacturing of oleochemicals through its 91% equity interest in Natural Oleochemicals Sdn Bhd (NatOleo).

The company also owns an integrated plant facility in the Pasir Gudang Industrial Estate in Johor, which manufactures and markets palm oil products. These products are certified `Kosher' and Halal and are exported to China, Japan, Souh Korea, Europe, Malaysia and the US.