It was heard on the grapevine that Kulim (Malaysia) Bhd’s downstream oleochemical arm, Natural Oleochemical Sdn Bhd (NatOleo), is up for sale and that the former has received a number of bids for it.

However, a Kulim official contacted by The Edge neither confirms nor denies this.

“As a dynamic business entity, Kulim Group continues to receive proposals from third parties for numerous corporate business arrangements. In dealing with these proposals, Kulim Group works closely within the guidelines stipulated by the authorities, especially in making timely and appropriate announcements when any of the proposals received have been agreed upon or accepted. Currently, Kulim Group has no announcement to make on any of the proposals it has received,” the official says.

According to Kulim’s 2008 annual report, it owns 91.38% of NatOleo, which is involved in the production of oleochemicals such as fatty acids, glycerine, esters, soap noodles and palm wax. NatOleo’s operation is located on a 10ha site in Pasir Gudang, Johor, and has a production capacity of 498,000 tonnes per year. In 2008, it sold more than 500,000 tonnes of its products.

An analyst says NatOleo is the second largest oleochemical player in Malaysia after IOI Corp Bhd. NatOleo was established in 1991 but Kulim bought into it only in 1994, as part of a strategy to cushion itself against volatility in its plantation earnings that are exposed to fluctuations in global commodity prices. But then, NatOleo has no protection against volatile commodity prices because there is no complete integration in the production chain as Kulim does not own any refineries in Malaysia.

This means the upstream operation has to sell its crude palm oil to refineries while NatOleo has to buy the refined products from them as raw materials for its oleochemical operations.

The analyst says downstream operations make sense for a plantation owner with a sizeable landbank. But without integration, the oleo business is subject to a margin squeeze if raw material prices fluctuate too wildly while the prices of end products remain static.

Note that most of Kulim’s landbank is located outside Malaysia, mostly in Papua New Guinea and held under New Britain Palm Oil Ltd. As at Dec 31, 2008, Kulim had 37,796ha of oil palm estates in Malaysia, predominantly in Johor. It also owns three mills in Malaysia.

In contrast, IOI Corp with close to 50,000ha of plantation estates in Peninsular Malaysia (about 60% in Johor and Negeri Sembilan), has two refineries in Pasir Gudang with a combined annual capacity of 1.3 million tonnes. Its Penang and Johor-based oleochemical manufacturing activities have a combined annual capacity of 710,000 tonnes.

In 2008, NatOleo’s operating profit plunged 47.1% to RM33.5 million and experienced a paper-thin margin of 2.2%. In 2007, its operating margin was higher at 5.8%.   

The group explained in its annual report that its operating profit margin was severely affected in 4Q2008 with many of its foreign buyers defaulting on their purchases.

“Since the sales contracts were transacted on a back-to-back arrangement with earlier purchases of raw materials at higher prices, the group as a consequence of the defaults had to resell the final products at much lower prices,” it said.

NatOleo’s bottom line also took a hit from downward year-end stock valuation adjustments due to falling prices.

For FY2009 ended Dec 31, NatOleo registered an operating loss of RM25.5 million. Its other manufacturing businesses, namely rubber-based products and biodiesel, were also in the red, leading to a total loss of RM38.4 million for the entire division, compared with a profit of RM29.6 million in FY2008. 

If the sale turns out to be true, could Kulim be selling NatOleo due to the gap in the value chain or could it be for other financial reasons?

Kulim’s net gearing as at Dec 31, 2009, stood at a reasonable 0.38 times. It was announced in February that Kulim’s 50.68%-owned subsidiary New Britain Palm Oil Ltd is acquiring an 80% interest in CTP (PNG Ltd) from CTP Holdings Pte Ltd for US$175 million. The acquisition will be funded by existing resources and a term loan facility.

Last month, Kulim said it was selling Menara Ansar in Johor Baru to Al-’Aqar KPJ REIT for RM105 million to be settled by RM63 million cash and the balance by units in the REIT. The cash proceeds will be used to settle bank borrowings.

Could it be that it is Kulim’s parent Johor Corp Bhd that needs the funds? It is understood that out of Johor Corp’s RM3 billion bond, RM2.1 billion is still outstanding and matures in 2012. Does this mean a bumper dividend can be expected from Kulim so that cash can flow into Johor Corp to help it meet some of its debt obligations that could be soon?

As for the possible sale of NatOleo, how much will it fetch? In the past, analysts have tagged the oleochemical business’ replacement value at between RM700 million and RM800 million. If the sale does happen, it may not be such a bad thing for Kulim as it will be rid of a business it could probably do without.

 
This article appeared in Corporate page of The Edge Malaysia, Issue 800, Apr 5-11, 2010