Batu Kawan : Undervalued gem UNRATED

STOCK FOCUS OF THE DAY

Batu Kawan : Undervalued gem                UNRATED

We believe that Batu Kawan is undervalued. Stripping out the value of Batu Kawan's (BKB) 46.6% shareholding in Kuala Lumpur Kepong (KLK) of RM12.1bil from the former's market capitalisation of RM8.3bil, it appears that the market is not attaching any value to BKB's other assets. We estimate the net asset value of BKB's chemical and property assets at RM603.6mil. At the company level, BKB has gross cash of RM294.4mil and borrowings of RM500mil.  BKB is currently trading at a FY16 PE of 25.2x (ex-EI). Assuming BKB's net profit grows by a modest 10% in FY17F, the group is presently trading at a FY17F PE of 22.9x. In contrast, KLK's FY17F PE is 24.6x. As such, BKB is a slightly cheaper entry to KLK. Excluding KLK, BKB's main business activity is its chemical operations. Apart from the chemical activities, BKB is also involved in plantation and property businesses.

BKB's chemical division recorded revenue of RM417mil and pre-tax profit of RM106.7mil in FY16. The group is the largest producer of chlor-alkali chemical products in Malaysia. The group's chlor-alkali products include chlorine, caustic soda and hydrochloric acid. BKB has an annual production capacity of 116,000 tonnes of caustic soda. The group's market share is estimated at 55% to 60%. Average utilisation rate is close to 90%. BKB's chemical plants are located in Perak and Terengganu. On its own, BKB has plantation landbank of 7,758ha in East Kalimantan. BKB has planted areas of 5,278ha currently. The group is applying for HGU (Hak Guna Usaha) licence for another 2,030ha of land. The plantation division recorded revenue of RM85.4mil and pre-tax loss of RM5.7mil in FY16. BKB owns Menara KLK in Mutiara Damansara. The group is also involved in property ventures in Melbourne and Perth via equity stakes of 14.75% to 50%.

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Public Bank : ROE to continue to trend lower moving forward     HOLD

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