Kulim ... Dec10

S & P Standard : Results Review & Earnings Outlook
 Kulim’s 9M10 results exceeded our expectations with strong performance from New Britain Palm Oil (NBPO LN, GBP7.40, Not  Ranked). Net profit surged 3.6x YoY to MYR361.2 mln. The results included MYR151.6 mln net gain from the recent sale of the oleochemical operations.

 50.7%-owned NBPO outperformed on better-than-projected palm oil prices and output. Pre-tax profit from Papua New Guinea & Solomon Islands (PNG/SI) increased 33.6% YoY to MYR286.7 mln (51.1% of
group pre-tax). The plantations in Malaysia contributed pre-tax profit of MYR112.7 mln, which was in line.

 The food & restaurant businesses, which is grouped under QSR Brands (QSR MK, MYR5.78, Not Ranked), contributed MYR189.2 mln - up 18.2% YoY driven by outlet expansion, the introduction of new
products and various promotions.

 We raise 2010-2011 net profit by 30% and 35.6%, respectively. The strong plantations’ performance should continue in 4Q10 and 2011. NBPO will continue to drive the growth underpinned by its young
plantations and improving efficiencies at Kula Palm Oil estates, which was acquired in April 2010. We expect palm oil prices to remain firm on growing demand for edible oils from both food and non-food sectors. We raise our CPO price assumptions for 2010-2011 to MYR2,700/ton and MYR2,800/ton, respectively from MYR2,400/ton-MYR2,500/ton. We expect rising consumer spending and the planned opening of more new outlets locally and abroad to support the growth for the food & restaurant businesses.

Recommendation & Investment Risks
 We maintain our Buy call on Kulim with a higher 12-month target price of MYR14.00 (from MYR9.50) following the earnings upgrade and after adjusting our valuation parameters.  We remain positive on the outlook of the group’s plantations in PNG/SI, which has proven to be a strong contributor to Kulim earnings.
NBPO is undertaking various operational changes at Kula Palm Oil estates to gradually improve yield and productivity over the next 24 months. Rehabilitating of underperformed oil palm plantations is not new to NBPO. Its 6,361 ha estates in Solomon Island were previously abandoned oil palm plantations. NBPO took over the estates in 2005. Since then, the estates’ productivity has steadily improving with palm yield doubling to nearly 21 ton/ha, presently from 10.5 ton/ha in 2006.

 The target price is derived from a PER-based sum-of-parts method and includes our projected dividend. We raise our assigned PER for: (i) plantations to 12x (from 11x), in line with the higher valuation for
NBPO; and (ii) the food & restaurant operations to 10x (from 8x). We believe the recent offer by Carlye Group to acquire QSR Brands at MYR6.70/share (which was rejected) has set a higher valuation
benchmark for QSR. The assigned PERs, nonetheless, remain at a discount to the current valuations of NBPO and QSR Brands.

 Risks to our recommendation and target price include: (i) palm oil price fluctuations; (ii) weaker USD, which could result in translation loss of NBPO earnings; and (iii) an economic slowdown, which could affect
consumer spending.