Thursday, September 15, 2011

Kulim ... Sep11

The disposal of assets by JCorp is not unexpected as the deadline to pay up its first tranche of debts worth RM3.6 billion draws near. However, with Kulim already in a net debt position, questions arise whether Kulim should be buying more assets or selling its own assets to address its net debt position.

Pressure for JCorp to sell anything else now (Sept 2011) is probably much less as they’ve bought themselves some breathing space with the sale to Kulim. The purchase of land for RM700 million and the privatisation of Sindora for RM26 million will increase Kulim’s net debt position of RM1.39 billion as at June 30 2011 by almost 53% to over RM2.12 billion.

Also notable is that Kulim’s net operating cash flow was reduced by 19.2% in 1HFY11 ended June 30, from a year ago to RM343.2 million. This was despite the 257% increase in net profit to RM273.4 million.

Generation of cash flow is expected to be even more challenging moving forward given the decrease in crude palm oil prices. The synergy gain from Sindora is not expected to be that significant to the group.

As at June 30 2011, Kulim had cash of RM707.8 million, borrowings of RM2.1 billion and shareholders’ funds of RM3.86 billion. The net debt of RM1.39 billion translates into a net gearing ratio of 36% — before the latest purchases, which will raise it to around 55%.

Decreasing cash flow and rising debt warrant several pertinent questions: Will Kulim restructure its debts or sell off its assets to lessen the burden on its balance sheet?

After all, disposing of assets is not alien to Kulim, which has been divesting its assets to raise funds to help lower its gearing over the past years.

In March 2010, Kulim proposed to sell Menara Ansar in Johor Bahru to Al-’Aqar KPJ REIT for RM105 million — RM63 million in cash and the balance in the REIT’s units.

There were also proposals from other interested parties to buy its stake in QSR, which fell through following strong protests. The sale of QSR could have netted. Kulim RM1.62 billion in gains, based on its initial investment in QSR at RM280.13 million or RM3.20 per share in 2005. This was based on the two offers, which valued QSR at RM1.94 billion or RM6.70 per share, made by Carlyle Investment Advisors Ltd and Tan Sri Halim Saad’s Idaman Saga Sdn Bhd (ISSB).

Now (Sept 2011) that QSR is out of the question, Kulim has few options left in terms of which of its assets it wants to monetise. Whether or not the disposals would fetch a premium is another question.

For one, there are a few disposals that can match Kulim’s divestment of its 91.4% stake in NatOleo for RM450 million in cash.

One asset that may be lucrative on the selling block is Kulim’s 50.7% stake in London-listed New Britain Palm Oil Ltd, which is valued at RM2.8 billion (£594.2 million) based on share price of £8.10.

And now (Sept 2011) that it owns all of Sindora, the company could also be next on the selling block. The additional 24.5% stake’s earnings contribution from Sindora to Kulim should be negligible. Sindora made RM18.3 million in FY10 compared with Kulim’s net profit of over RM387 million. Sindora has a current valuation of RM250 million, based on Kulim’s takeover price.

Kulim owns a few properties and landbank that can be monetised.

JCorp has plenty of other assets at its disposal that may fetch a hefty premium, including stakes in KPJ Healthcare Bhd and property developer Damansara Realty Bhd. Hence, it is understandable why rumours are running that these latest moves may be only the start of another restructuring exercise for the JCorp group of companies.

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