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This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

Ipoh-based Batu Kawan Bhd is widely known as the parent company of locally listed plantation giant Kuala Lumpur Kepong Bhd (KLK). However, many may not know that Batu Kawan is also Malaysia’s largest producer of chlor-alkali chemical products, which include chlorine, caustic soda and hydrochloric acid.

Its chemical plants in Perak and Terengganu have an annual production capacity of 116,000 tonnes of caustic soda. These factories run at an average utilisation rate of close to 90%. The group’s market share is estimated at 55% to 60%.

To be sure, the bulk of Batu Kawan’s profit comes from KLK. Even so, profit attributable to Batu Kawan’s shareholders grew to RM825.2 million in FY2016 from RM483.7 million in FY2013, translating into a three-year compound annual growth rate of nearly 20%. While KLK’s is slightly more impressive at 20.2%, we had imposed a penalty on KLK in The Edge Billion Ringgit Club calculations as its FY2015 net profit fell below the FY2013 base year, resulting in Batu Kawan coming just ahead of KLK for the 2017 BRC award for highest growth in profit after tax over three years.

Batu Kawan also delivered higher return on equity than most of its peers in the plantation sector. Its three-year adjusted and graduated ROE was nearly 15%, just below 17% at KLK, which came out ahead in the ROE category.

In any case, Batu Kawan’s shares only rose about 5% from RM17.88 on March 31, 2014, to RM18.75 on June 30, 2017, which translates into an annualised total return of 1.47% over the period of three years and three months. Still, the company has been consistently paying a dividend per share of at least 50 sen in the last five years. It declared a total DPS of 55 sen, with a total distribution of RM222.85 million for FY2016, representing a payout ratio of 27%.

In Batu Kawan’s 2016 annual report, chairman Tan Sri Lee Oi Hian says given the low stocks and tight supplies caused by El Niño and slow crop recovery, there is some optimism that higher crude palm oil prices will prevail. In fact, CPO and palm kernel prices in particular have improved, helped partly by a weaker ringgit.

“On the global front, there are increasing signs of a slower world economy and new uncertainties … [that we] will need to be cognizant about. In such times, we will maintain our focus on maintaining operational efficiency while keeping alert to opportunities that may come along,” he states.

Lee, 66, joined the board of Batu Kawan in 1979. He is also the CEO of KLK. Lee and his younger brother Datuk Lee Hau Hian are the substantial shareholders of Batu Kawan with a 51% stake.

AmInvestment Bank Research issued an unrated report on Batu Kawan dated Feb 3, in which it describes the stock as an undervalued gem.

If the value of Batu Kawan’s 46.6% holding in KLK of RM12.1 billion is removed from the former’s market capitalisation of RM8.3 billion, it would appear that the market has not attached any value to Batu Kawan’s other assets, the research house says.

“We estimate the net asset value of Batu Kawan’s chemical and property assets at RM603.6 million. At the company level, Batu Kawan has gross cash of RM294.4 million and borrowings of RM500 million,” says AmResearch.

It adds that assuming a holding company discount of 20%, Batu Kawan would still be trading at a significant discount of 17.9% to its revalued net asset valuation. Moreover, it is a slightly cheaper entry to KLK due to its lower price-earnings ratio.

“Excluding KLK, Batu Kawan’s main business activity is its chemical operations and [it] is also involved in plantation and property businesses,” says AmResearch. The plantation division recorded revenue of RM85.4 million and pre-tax loss of RM5.7 million in FY2016, it adds.

The group owns Menara KLK in Mutiara Damansara (where The Edge is located) and is also involved in property ventures in Melbourne and Perth via equity interests of 14.75% to 50%, says AmResearch.

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