The emergence of Norwegian fund management company Skagen AS in Kulim (Malaysia) Bhd earlier this month failed to lift investor interest in the plantation company. In fact, Kulim’s share price dropped two days after Skagen took up a stake in the company.

A filing with Bursa Malaysia shows the fund manager accumulated a total of 16.87 million shares on the open market at about RM7.40 apiece on Oct 6. This block of shares is equivalent to a 5.3% stake, making Skagen the second-largest shareholder in Kulim.

Kulim’s largest shareholder is Johor Corp, with 50.98% or 162.45 million shares, while the Employees Provident Fund  is the third largest, with 4.75% or 15.13 million shares.

“The entry of this type of value funds doesn’t usually drive up prices unless they are hedge funds. Then maybe you could see the share price run up a little bit,” an analyst with a local research house says.

A check on Bloomberg shows that five out of eight analysts have a “buy” recommendation on Kulim. Four of them have put Kulim’s target price at above RM8, with the highest being RM8.85 by AmResearch.

The stock closed at RM7.35 last Thursday.

Kulim has gained some 49% since March, beating the FBM KLCI and the Kuala Lumpur Plantation Index, which rose about 44.3% and 45% respectively in the same period. However, the stock has been hovering around RM7.30 to RM7.60 since early August and may not breach this range anytime soon. If anything, it is more likely to head south, unless of course crude palm oil (CPO) prices pick up.

OSK Research, which downgraded Kulim to “neutral” from “trading buy” after its disappointing 2Q results, says the counter lacked near-term catalysts to pique investor interest. It has maintained its target price at RM7.22.

For 2Q2009 ended June 30, Kulim’s net profit plunged 65.6% to RM 30.9 million from RM89.9 million in the previous corresponding period despite revenue rising 30% to RM1.5 billion. Its plantation division recorded lower revenue, down 7.3% to RM788.9 million from RM851.4 million previously. Some 71% of its plantation revenue came from operations in Papua New Guinea (PNG) and the Solomon Islands through its 51% stake in New Britain Palm Oil Ltd (NBPOL).

NBPOL, which is known to be Kulim’s jewel in the crown, could be the factor attracting foreign investors such as Skagen. NBPOL is listed on the London Stock Exchange and Port Moresby Stock Exchange and owns more than 80,000ha of oil palm estates in PNG and the Solomon Islands.

The analyst notes that NBPOL’s prospects seem to draw more foreign than local investors. “The local investors are already there but there is nothing exciting to convince them to switch to this plantation counter.

“Also, Kulim’s diversification into other businesses like the resilient F&B sector via its stake in QSR Brands Bhd has not really drawn much interest because investors still look at it as a plantation counter. They don’t really take into account the fact that the F&B unit has been contributing positively to Kulim’s results,” he says.

It is also likely that the Norwegian fund bought into Kulim because its valuation is cheaper than that of its peers, for example Genting Plantations Bhd, the analyst adds. Nevertheless, the market seems to have ignored this fact.

Kulim’s estimated price-earnings ratio (PER) is at 10.48 times, according to Bloomberg, compared with the industry average of 19.01 times. In its 2008 annual report, the group reported a total landbank of 124,833ha, of which 82,644ha are planted.

“We downgrade our call to ‘sell’ from ‘hold’ following the recent price appreciation. We maintain our 12-month target price of RM6.50, implying a 12.3% downside potential,” Standard & Poor’s says in a recent report. Its recommendation is based on the assumption that CPO prices could average  RM2,300 to RM2,400 next year.

The target price is derived from a PER-based sum-of-parts method. Standard & Poor’s valued the earnings from Kulim’s subsidiaries QSR Brands and Sindora Bhd at a discount to its target multiples for the respective stocks while the remaining earnings — essentially from its plantations — are valued at a PER of 10 times, which the research outfit says is within the PER range for medium plantation stocks.

It notes that Kulim’s successful oil palm plantation operations in PNG have set it apart from its peers and will remain its growth driver given that the palms in that area are still young. The group’s plan to expand the plantation area in PNG also means more room for growth.

“The company is well managed and its operations abroad are an asset. However at this stage, we don’t see new catalysts for higher valuation for the group,” Standard & Poor’s adds.

This article appeared in Corporate page of The Edge Malaysia, Issue 779, Nov 2-8, 2009.