Batu Kawan an undervalued gem, says AmInvestment Bank Research

KUALA LUMPUR (Feb 3): AmInvestment Bank Research, which issued an unrated report on Batu Kawan Bhd, sees the stock as an undervalued gem.

In the report today, the research house said stripping out the value of Batu Kawan's 46.6% shareholding in Kuala Lumpur Kepong Bhd (KLK) of RM12.1 billion from the former's market capitalisation of RM8.3 billion, it appeared that the market is not attaching any value to Batu Kawan's other assets.

"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," the research house said.

Batu Kawan is currently trading at a 34.3% discount to its revalued net assets valuation (RNAV) per share of RM28.90.

AmInvestment Bank said that assuming a holding company discount of 20%, Batu Kawan would still be trading at a significant discount of 17.9% to its RNAV.

Currently, Batu Kawan is trading at a FY16 price-to-earnings (PE) of 25.2x (ex-EI) and assuming Batu Kawan's net profit grows by a modest 10% in FY17, the group will be trading at a FY17 PE of 22.9x. In contrast, KLK's FY17 PE is 24.6x. As such, Batu Kawan is a slightly cheaper entry to KLK, it said.

"Excluding KLK, Batu Kawan's main business activity is its chemical operations and (it) is also involved in plantation and property businesses," it said.

The group is Malaysia's largest producer of chlor-alkali chemical products, which include chlorine, caustic soda and hydrochloric acid, in which its chemical division recorded revenue of RM417 million and pre-tax profit of RM106.7 million in FY16, it added.

Batu Kawan 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%. Batu Kawan's chemical plants are located in Perak and Terengganu.

Batu Kawan has plantation landbank of 7,758ha in East Kalimantan as well as planted areas of 5,278ha currently, and the group is applying for a Hak Guna Usaha licence for another 2,030ha of land, it said.

Batu Kawan's plantation division recorded revenue of RM85.4 million and pre-tax loss of RM5.7million in FY16, said the research house.

The group owns Menara KLK in Mutiara Damansara and is also involved in property ventures in Melbourne and Perth via equity stakes of 14.75% to 50%, it said.

Shares in Batu Kawan were last traded at RM18.98 yesterday, giving it a market capitalisation of RM7.68 billion. — theedgemarkets.com