Welcome to Kulim (Malaysia) Berhad’s (“Kulim” or “The Group”) Integrated Annual Report for the Financial Year ended 31 December 2015. With our sights set high, I am very pleased to report that 2015 was a good year for Kulim and it underscores the underlying strength of our business. Despite facing strong and unprecedented headwinds, we successfully kept our Company on a strong and stable trajectory to make solid progress on our strategic priorities on several fronts.
The Group’s credible performance underpins the theme chosen for this year’s report: ‘Resourceful. Reciprocal’. More than a catchy alliteration, the theme encapsulates the two (2) key elements that have been the hallmarks in our ongoing transformation journey.
We are essentially a resource-based business but Resourcefulness is also a core strength of Kulim and this is amply demonstrated by our highly motivated and talented workforce. Pulling together as a powerful and cohesive team, they are the foundation of our success, using their expertise and innovation to getting the best out of our operations. In a changing business landscape, Reciprocity is our willingness to put back as much as we take out, as well as to m eet the diverse interests of our multiple stakeholders with farsightedness and disciplined execution. Our stakeholders include our parent company, investors, the various communities in which we operate and of course you - our shareholders.
Last year, we produced our first Integrated Annual Report, which is a departure from the traditional investment information based on financial metrics alone. By adopting an integrated approach, our aim is to tell our own comprehensive value creation story by taking a holistic view of capitals, strategy, governance, performance and prospects. We hope you find our report more informative and we welcome any feedback from you.
On behalf of the Board of Directors, it gives me pleasure to present the second Integrated Annual Report and Audited Accounts of Kulim (Malaysia) Berhad for the financial year ended 31 December 2015.
A CREDIBLE YEAR
In 2015, Group’s revenue was up 34.37% to RM1.47 billion, while Profit Before Tax (“PBT”) rose by 70.10% to RM162.51 million. The Plantation Segment was by far the biggest contributor, accounting for 52.89% or RM777.26 million of the Group’s revenue. Revenue from our Oil and Gas (“O&G”) Segment increased by more than 220.29% to RM582.30 million, contributed mainly by the newly-listed E.A. Technique (M) Berhad.
With the divestment of our entire stake in New Britain Palm Oil Limited (“NBPOL”) completed on 26 February 2015, a special dividend amounting to approximately RM500 million was declared and subsequently paid out to shareholders on 23 March 2015.
Operationally, the year under review saw Fresh Fruit Bunches (“FFB”) and Crude Palm Oil (“CPO”) production increased by 5.36% to 886,172 tonnes and 14.12% to 294,284 tonnes respectively. These were achieved despite the worst haze we have experienced in many years and the onslaught of the El Nino phenomenon, which some analysts say could be the most severe on record. The age profile of our palm trees was at its best ever, with trees in their prime of 9 to 18 years accounting for 44% of the total planted area. Significant progress was also made in managing costs, enhancing productivity and eciency. I am also pleased to report that these targets were achieved whilst meeting our primary sustainability objectives.
The year also saw the completion of corporate exercises that will further contribute towards the quality of our investment portfolio and ensure sustained growth in the years ahead. While the sale of our entire stake in NBPOL to Sime Darby Plantation Sdn Bhd closes a chapter on our operations in Papua New Guinea (“PNG”) and the Solomon Islands (“SI”), a new chapter was opened with the expansion of our plantation business in Indonesia.
While we are pleased with the progress made in the past year, we see them as a stepping stone to 2016 and beyond. There is still a great deal more to do. Our ultimate goal is to deliver strong and sustainable shareholders’ returns from our portfolio of world-class assets and a compelling pipeline of projects. Sustained by our investments, we are reshaping the business for future success as part of our ongoing transformation journey. Over time, this is expected to lead to a dierent earnings profile for the Group and ultimately, create value for our shareholders.
Kulim’s vision is to deliver strong and sustainable value through high performance teams committed to the highest standards of ethics, integrity and professionalism. Underpinning everything that we do are our corporate values: Competitive; Action; Responsible and Ethical (“C.A.R.E”) driving a culture marked by transparency, integrity and empowerment. Our values are fundamental to the way we operate and form the basis of a sustainable business.
Our Business Model
Taking a long-term disciplined approach, the Group’s vision is translated through our business model, which describes what we do and how we employ our resources to deliver consistent, profitable and responsible growth and sustainable value for our stakeholders.
Plantation has traditionally been our core business but over the years our business model has been fine-tuned to reflect a rapidly changing operating landscape. While we have selectively divested our plantation interests in PNG and the SI, we continue to strengthen our position by securing new areas in Indonesia. Central to our Five (5)-Year Strategic Plan and our Balanced Business Strategy is the diversification of our business activities in order to strengthen our earnings base and cushion the impact of fluctuating palm product prices.
As a result, the Group has now built a strong and diverse portfolio anchored in three (3) main lines of business covering Plantation, Intrapreneur Ventures and Oil & Gas, whilst consolidating its Agrofoods segment. This balanced and diverse asset base means that the Group has a broad platform from which to deliver the levels of profitability and long-term value required to support growth.
Our performance reflects our strategy, which proves that we are on the right track. We have forged a cogent strategy based on leveraging the capabilities and scale of the Group, focusing our resources on attractive markets where we have a distinct competitive positioning to maximise these opportunities. Having reshaped the Group with strategic moves, our focus on execution has driven tangible results and taken performance to new levels.
It is a strategy that has served us well and will reinforce our foundation for future success and ensure value for all our stakeholders. We cannot relent in our efforts to boost asset quality and we are constantly fine-tuning our portfolio to maintain the high quality of our asset base.
Sustainability is a key pillar of our strategy and we work closely with stakeholders to ensure it is embedded into the Group’s businesses and operations in Malaysia and beyond. The Group takes its entrepreneurial responsibility towards the environment very seriously by developing a detailed materiality process whereby we have identified key areas of sustainability that are the most significant for our business and stakeholders
We have established short, medium and longer-term sustainability targets. In 2015, our key sustainability achievements include the publication of our second biennial carbon report and Halal certification for palm products produced at four (4) of our mills. An ongoing commitment is to reduce our Lost-Time Accident and fatality rates and I am pleased to report that in 2015, no on-the-job fatalities were recorded. Some of our medium-term goals include gradually reducing the use of glyphosate and paraquat in our plantations. We are also committed to achieving Vision 30:30, which aims to raise FFB yields to 30 metric tonnes per hectare and palm product extraction rates to 30%. With replanting of existing oil palms with new higher yielding breeds, the target to achieve Vision 30:30 has been pushed up to the year 2036.
Kulim strives to be a responsible corporate citizen and we take pains to integrate environmental, social and corporate governance issues into our investment decisions to create long-term value. Regardless of the prevailing economic conditions, we have always maintained a strong commitment to community programmes and to managing our environment impact. Nor do we compromise on our investments in training, safety and other employee support programmes.
2015 was a relatively quiet year for the Group on the corporate front, where the focus was on completing the various corporate exercises announced previously.
On 24 August 2015, Kulim entered into a Shares Sale and Shares Subscription Agreement (“SSSSA”) for the proposed acquisition of a 51% equity interest in Classruum Technologies Sdn Bhd (“CRTSB”) for a total purchase consideration of RM1.6 million. CRTSB is principally involved in the Information, Communication and Technology (“ICT”) business, notably through the development of the Classruum.com programme that facilitates e-learning and encourages interaction between teachers, students and experts on a social media platform.
This social media network would enhance the student’s interest in studies by facilitating a broader and wider access to learning materials and tutors whilst the Classruum.com system will be able to gauge their strengths, weaknesses and levels of interest.
Acquiring CRTSB is part of Kulim’s long term business plan to diversify in other business activities. More than that, it is part of our Corporate Responsibility eorts, a contribution towards the progress of national education.
Outside the 2015 review period, there were two (2) recent corporate developments that took place in February 2016 that will be covered more extensively by the Managing Director. Very briefly, the first saw our 74%-owned subsidiary, PT Wisesa Inspirasi Nusantara entered into four (4) Conditional Share Purchase Agreements (“CSPA”) to take control of four (4) medium-sized Indonesian oil palm plantation companies for a total consideration of IDR1.64 trillion (approximately RM509.35 million) cash. The acquisitions will boost Kulim’s total plantation landbank in Indonesia from the present 40,645 hectares to 145,549 hectares.
In the other recent corporate development, you may recall that as reported last year, our wholly-owned subsidiary Kulim Energy Nusantara Sdn Bhd (“KENSB”) entered into a Conditional Subscription and Shares Purchase Agreement (“CSSPA”) for a 60% stake in PT Citra Sarana Energi (“PT CSE”). On 7 February 2016, owing to the prevailing lower prices of oil and natural gas, KENSB had entered into a Supplemental Agreement (“SA”) with PT CSE to modify the terms of the CSSPA. As a result, our acquisition of PT CSE has now been revised to USD80 million, which is 40% less than the original investment of USD133.55 million (approximately RM462.68 million).
On 5 November, the Board of Directors received a letter from our major shareholder, Johor Corporation (“JCorp”), requesting Kulim to undertake a Selective Capital Reduction and Repayment (“Proposed SCR”) exercise. The Proposed SCR will entail a capital repayment of the proposed cash amount of RM4.10 per Kulim Share. The exercise will in effect result in the privatisation of Kulim and its delisting from the Main Market of Bursa Malaysia Securities Berhad.
Post disposal of NBPOL, Kulim’s plantation hectarage has been significantly reduced. The Group is also venturing into the Oil and Gas (“O&G”) exploration business in Indonesia but given the present volatility in oil prices, it may take a while longer for this new business segment to emerge as a significant contributor to Group earnings.
Having taken into consideration the best interests of shareholders, the
Proposed SCR presents a good opportunity for Kulim’s minority
shareholders to realise cash for their investments at an attractive premium
above the prevailing market price of Kulim shares.
At a meeting on 17 November, the Board of Directors deliberated on the
contents of the letter from JCorp and decided to present the Proposed SCR
to the shareholders of Kulim for their consideration at an Extraordinary
General Meeting (“EGM”) slated in May 2016. Barring unforeseen
circumstances, the Proposed SCR is expected to be completed by the third
quarter of 2016.
In the meantime, we are proceeding with the due process to obtain the
required approvals from the relevant authorities, including the Securities
Commission of Malaysia. Prior to the EGM, we have plans to meet with our
substantial shareholders to address queries or concerns they may have
regarding the Company’s current corporate developments. Our own people
have also been kept abreast of developments within the Group and during
the year, we have organised no less than five (5) Employees’ Engagement
STRENGTHENING CORPORATE GOVERNANCE
The Board embraces good governance as a driver of organisational eciency, growth and performance. We are determined that Kulim be known for its high standards of corporate governance. From a corporate governance perspective, 2015 was a year of consolidation with several initiatives implemented that will help us in the Group’s day-to-day operations:
A compliance gap analysis was conducted, followed by the implementation of an improved Health, Safety and Environment (“HSE”) plan to safeguard the Group’s reputation and maintain compliance to the Roundtable on Sustainable Palm Oil (“RSPO”) certification.
As part of succession planning, senior management personnel in
several Management Committees in the IV business segment were
replaced with the person next in line.
Employees’ engagement sessions were held both at high and closed
levels to disseminate information on the Group’s performance, the
latest corporate developments and to improve staff morale. The
sessions also provided a platform for dialogue between employees
and top management, whilst improving communication ties and staff
Establishment of four (4) Sustainability and Initiatives Council (“SIC”)
Sub-committees to look into the implementation and assimilation of a
sustainability and quality work culture.
AWARDS & ACCOLADES
In the closing days of 2014, Kulim (Malaysia) Berhad was honoured to be
among a selected group of corporations in Malaysia to be included in the
FTSE for Good Bursa Malaysia Index. The index has been designed to
measure the performance companies using globally recognised
Environmental, Social and Governance (“ESG”) standards.
Much to our gratification, our very first Integrated Annual Report was
acknowledged by several coveted awards. No stranger to the National
Annual Corporate Report Awards 2015 or better known as NACRA our
Integrated Annual Report 2014 was awarded a Certificate of Merit. Our
report was also on the short list for the Best Reporting within an Annual
Report by ACCA Malaysia Sustainability Reporting Awards (“Masra”) 2015.
We are equally humbled and excited that two (2) of our reports were also
accorded recognition regionally. The Kulim’s Integrated Annual Report 2014
was one of the finalists for Asia’s Best Integrated Report by Asia Sustainability
Reporting Awards 2015 while our Kulim’s Carbon Footprint Report 2014 was
awarded as Highly Commended for Asia’s Best Carbon Disclosure.
We never lose sight of the fact that we are stewards of a business that was
built over 80 years. The coming financial year will mark Kulim’s 40th
Anniversary as a listed entity in 2016. Events are still unfolding as we go into
print, but regardless of the outcome of the EGM for the proposed
privatisation in 2016, there is no doubt in our mind that the Group will
continue to prosper in future years.
The goals we have set ourselves in the coming years are aggressive but
realistic. From our position of strength, we have identified a clear path for
the future and the flexibility to grow our businesses. With the right business
model, well-defined strategies, talented people and structures in place, we
will continue to move forward to capitalise on our positive momentum and
to seize meaningful opportunities for top and bottom line growth.
Consider what we have for us - our fundamentals are strong and this is
attested to by the quality of our balance sheet. The Group realised a gain of
RM1.32 billion with the disposal of NBPOL and this has increased our cash
balance from RM342.60 million as at end-2014 to RM1.53 billion as at
end-2015. The gross gearing level of the Group has also improved from 0.21
times to 0.18 times mainly due to significant settlements during the year.
These are big plus points that will contribute to our competitiveness.
Our ventures into the O&G support services are already delivering a new
revenue stream for the Group and this has helped oset a weaker
performance from the Group’s traditional oil palm business. In moving up
the O&G value chain, the coming year will see plans shift into higher gear
for the development of the South West Bukit Barisan (“SWBB”) Block in
Indonesia. We hope to obtain approval for the Plan of Development (“POD”)
from the relevant authorities in Indonesia this year, that will pave the way for
lifting of gas as early as the fourth quarter of 2017.
We are also focusing attention on the consolidation of our Agrofoods
business. We aim to expand the Group’s cattle operations, focusing on
fattening, trading and feedlot activities. As at December 2015, a total
population of 7,452 heads of cattle was recorded, a 8.49% increase from
6,869 heads recorded the previous corresponding period. We are also
managing two (2) feedlots at Bukit Nyamuk and satellite farm, Muar and we
are targeting to produce 800 heads of cattle for the market from these two
(2) feedlots. The Group has also been involved in cultivating pineapples and
the first phase of an enlarged pineapple project was initiated at the Ulu
Tiram Estate. As at December 2015, an area of approximately 181 hectares
have been planted with the superior MD2 variety versus 173 hectares
planted in 2014.
The Group is always looking at possibilities to unlock the value of its assets,
especially in its significant land-bank reserves, strategically located near or
adjacent to townships. With the progressive development of these areas
over the next decade, these estates will be due for conversion into property
development areas, where higher values will be realised. The first phase of
the REM Estates conversion, involving 95 acres for employees’ housing has
started. As at September 2015, earthworks have already been completed,
while the tender for construction works was out in November 2015.
Other landbanks such as the Sungai Papan (2,996 hectares) and Siang
Estates (3,391 hectares) also hold the potential for future property
development. These estates lie within the proximity of the PETRONAS
Refinery and Petrochemicals Integrated Development (“RAPID”) Project in
Pengerang and the growing township of Iskandar Malaysia in Johor.
Even though economic uncertainty and market volatility are likely to remain
issues, we move forward with the confidence that we know where we are
going and what we have to do to get there in this challenging but exciting
People are the ultimate source of our competitive advantage. The progress
made the past year was attributed to the high level of performance,
professionalism, dedication and commitment of our management and staff,
working closely together creating innovative synergies. Performance is part
of our corporate DNA and all of us at Kulim are committed to achieving
excellence in everything we do. I am exceedingly proud to be leading this
team of people.
Thank you also to a great support group, which includes our partners,
associates, consultants and the relevant government authorities in Malaysia
and Indonesia. Your understanding and support have helped us to achieve
our goals and expand our horizons. Our shareholders and other
stakeholders deserve special mention. Your loyalty has made all the
difference in a challenging year and I know we can continue to count on
We have a strong Board and the Group is in good hands. On behalf of the
Board, I take this opportunity to congratulate Datin Paduka Siti Sa’diah Sh
Bakir who was conferred with a Darjah Panglima Setia Mahkota (P.S.M),
which carries the title of Tan Sri and to the Managing Director, Ahamad
Mohamad who was named as the CEO of the Year for Sustainability (South
East Asia) in the International Alternative Investment Review Awards 2016. I
would also like to thank Ahamad Mohamad for his stewardship as the
Managing Director of Kulim since 1993.
I also wish to extend my heartfelt gratitude for your continued support,
without which none of what we achieved would be possible. Your faith in
our efforts and your belief in our capabilities have always been the source of
strength and will continue to motivate us. We look forward to your
continued support and hope to reward your confidence with a strong
performance, and returns in the years ahead.
Kulim stands at the threshold of what could well be the start of a new
chapter in its transformation journey. Whatever the future holds for the
Group as a corporate entity, Kulim remains an exciting and unfolding
The Group still has a long way to go in its transformation journey and I have
all the confidence in the Group to chart a successful future.
DATO’ KAMARUZZAMAN ABU KASSIM
Non-Independent Non-Executive Director