OSK upgrades Kulim to trading buy

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OSK Research has upgraded Kulim Malaysia Bhd to a trading buy at RM5.30 with a higher target price of RM7.50 to factor in stronger earnings this year.

“We believe the share price will be relatively resilient in the event of a crude palm oil (CPO) price correction as it is cheap even based on a very conservative CPO price. There is also a big gap between Kulim’s valuation and the top-tier Malaysian plantation stocks. This we believe is unjustifiable as the company’s fundamentals continue to improve significantly,” OSK said in a research note yesterday.

In addition, the local research house said Kulim is fully RSPO-certified (Roundtable of Sustainable Palm Oil) now.

“Following 50.5%-owned subsidiary New Britain’s certification by the RSPO in September 2008, Kulim’s Johor operation received its certification on Jan 29 this year, making it the only oil palm plantation company to be certified as a sustainable palm oil producer on a group-wide basis. This makes it the prime beneficiary of the shift to sustainable palm oil, particularly in the European market,” OSK said.

“Being an RSPO-certified sustainable palm oil producer helps with the sale of Kulim’s biodiesel. Management guides that it is in negotiation for long-term supply contracts which could use up to 70% of its own certified palm oil. The key condition of the contract is that the biodiesel must be produced from sustainably produced palm oil. The supply contracts offset the risk of the company’s 100,000-tonne per annum plant being mothballed,” it added.

“Certified palm oil commands a US$40 to US$50 (RM144 to RM180) per tonne premium in Europe. To take advantage of this, palm oil produced by Kulim’s Johor estates not used by the biodiesel plant will be shipped together with New Britain’s oil to Europe. This will give palm oil produced by Kulim in Malaysia traceability,” said the local research house.

OSK Research believed Kulim is still trading at very undemanding 6.4 times and 4.8 times FY08 and FY09 earnings respectively. “We believe the improvements in the company’s fundamentals have not been fully appreciated by the market, particularly its RSPO certification and its biodiesel potential. We are raising our target price from RM6.90 to RM7.50, valuing the stock at 10 times CY09 earnings, which is still a discount to the other Malaysian planters, which are trading at mid- to high-teen PEs,” it said.

However, OSK noted that it does not see any immediate catalyst for the stock price. Kulim added 10 sen to close at RM5.40 yesterday.

This article appeared in The Edge Financial Daily, April 14, 2009.