2016 Synopsis
Digital annual report 2016
Message From The Chairman

Resourceful . reciprocal

for a better future

2016 has been a dynamic year for Kulim. Faced with various challenges from fizzling crude oil prices to sizzling temperatures, we emerged stronger as we dug deep, looked within ourselves and restructured the organisation to be ore agile, advance further towards more sustainable operations and gear towards achieving consistent earnings growth throughout the Group. "

During the year, we made significant progress on our strategic initiatives, as our resourceful talents focused on capitalising and sustaining our resources and as we looked into different dimensions of reciprocity for each of our stakeholders. Hence, we have chosen to extend the theme “RESOURCEFUL. RECIPROCAL.” for this year’s Integrated Annual Report.      

We introduced the first Integrated Annual Report for the financial year ended 31 December 2014 (“IAR 2014”) in 2015 with the aim of providing greater information and sharing with you the Company’s comprehensive value creation story, our strategies, governance and performance. We believe the way forward is through greater disclosure to our shareholders and stakeholders, and we are humbled by the Recognition Award 2016 received for Kulim’s IAR 2014 for Pioneering Integrated Reporting (“IR”) in Malaysia’, presented during the MIA (Malaysian Institute of Accountants) IR Conference & Recognition Award, and the NACRA Awards 2016 (Main Board Companies) in Industry Excellence Awards in Plantation & Mining category for the 8 times in 9 years. Going forward, we aim to continue providing such information in current and future reports.

On behalf of the Board of Directors, I am pleased to present the third Integrated Annual Report and Audited Financial Statements of Kulim (Malaysia) Berhad for the financial year ended 31 December 2016.

Our transformation journey took another step forward in mid-2016 when our outgoing shareholders voted in favour of the proposal by our major shareholder, Johor Corporation (“JCorp”) to take Kulim private during the Extraordinary General Meeting (“EGM”) held on 3 May 2016.

The privatisation exercise began in November 2015 with JCorp’s request for Kulim to undertake a Selective Capital Reduction and Repayment (“SCR”) exercise involving a cash capital repayment of RM4.10 per Kulim Share, which paved the way for JCorp to take Kulim private. Upon completion of the exercise, on 4 August 2016 Kulim was delisted from the Main Market of Bursa Malaysia Securities Berhad.

With the privatisation, Kulim became a wholly-owned subsidiary of JCorp and would naturally share the corporate objectives and aspirations of the Johor state’s investment arm and economic development agency.

In making this decision to move forward, we also considered Kulim’s needs, as this exercise will improve the Group’s agility to decide and take affirmative steps to recalibrate and reinvigorate the business to face the challenges of the future.

Rest assured that, even after going private, our commitment to sustainability and to all our stakeholders remains unabated. We will remain steadfast in our commitment to embrace sustainability, with transparency and good corporate governance as the overriding philosophy.
Suffice to say, this is the start of a new chapter in Kulim’s transformation journey as we travel through many exciting and challenging phases to chart a successful future for the Group.
Following our decision to acquire a 60% stake in an Indonesian Oil and Gas ("O&G") company in late 2014, we have seen a significant decline in crude oil prices which led us to renegotiate for a lower investment sum. Consequently, on 10 February 2016 our O&G subsidiary, Kulim Energy Nusantara Sdn Bhd (“KENSB”), signed a Supplemental Agreement with PT Citra Sarana Energi (“PT CSE”), PT Wisesa Inspirasi Sumatera (“PT WIS”) and PT Inti Energi Sejahtera (“PT IES”) to modify the terms of Conditional Subscription and Shares Purchase Agreement (“CSSPA”) from USD133.55 million to USD80.00 million. 

Kulim also successfully expanded its plantation land bank in 2016 with the completion of its acquisition of PT Tempirai Palm Resources (“PT TPR”) and PT Rambang Agro Jaya (“PT RAJ”) on 23 June 2016, adding 8,345 hectares of planted oil palm in South Sumatera, Indonesia, to bring the Group’s total oil palm planted area to 55,680 hectares as at end-2016.

To further support our plantation operations, we have increased our interest in Kulim TopPlant Sdn Bhd (“KTP”) by acquiring the remaining 40% stake via an agreement signed on 8 December 2016. KTP operates a commercial production laboratory dedicated to the production of elite high-yielding oil palm clones using plant tissue technology. This acquisition supports our strategy in further developing plant tissue culture, as it is an important aspect of the oil palm industry. It also provides us with full control over the operations, widens the opportunity for us to enhance our technological knowledge and for our experts to delve further into the R&D for better yielding clones as well as culture methodology. A successful expansion in this area could potentially lead to significant returns for the Group.

Online education is a trend that is fast gaining popularity and it is also a way to reach out to the community in rural areas where infrastructure is limited. In view of the growth potential, we have decided to acquire a further 25% equity in Classruum Technologies Sdn Bhd (“CRTSB”) on 4 November 2016, bringing our total stake to 76%. It operates a social network for education and is part of Kulim’s Corporate Responsibility effort to contribute towards the progress of national education, prepare the younger generation for the future, and mould tomorrow’s leaders.

Another notable development is our decision to divest Granulab (M) Sdn Bhd, a medical device manufacturer namely the synthetic bone graft, to SIRIM Tech Venture Sdn Bhd in a deal completed on 13 November 2016 as part of our business consolidation efforts.
It can be said that 2016 was a year of records - it set a global heat record that sent crude palm oil (“CPO”) prices soaring to its 20-month high of RM3,200 per tonne in December. The year 2016 also witnessed crude oil prices tumbling to its lowest ebb in over three decades, driving the O&G industry into one of the severest downturns in years. This was compounded by the Malaysian Ringgit weakening to its lowest level since 1998.

The Malaysian Institute of Economic Research (“MIER”) has maintained its growth projection for Malaysia’s 2016 real GDP growth at 4.2%, amidst a sluggish external sector, and it sees 2017 growth at 4.5% with domestic demand likely to continue to be the engine of growth.

Despite the challenging environment, Kulim managed to bag revenue at RM1.61 billion in 2016, gaining 11.6% over the preceding year’s RM1.44 billion, mainly contributed by the Plantations Division.

Riding on the coattails of favourable CPO prices, which averaged at RM2,532 per tonne in 2016, revenue for the Plantations Division grew by a remarkable 15.73% to RM899.52 million during the year under review, compared with the preceding year’s RM777.26 million.

However, dry and erratic weather over the past couple of years, exacerbated by El Nino’s scorching heat and suppressed rainfall, had reduced flowering and fruit production. This pruned Kulim’s Fresh Fruit Bunches (“FFB”) output by 3.92% to 851,435 tonnes and consequently trimmed CPO production by 7.10% to 273,354 tonnes during the year.

Consequently, our unit production cost increased by 5.5% from the preceding year’s RM252 per tonne mainly due to lower crop production in 2016.

At the same time, we were unable to dust off concerns over the impact of low crude oil prices on demand for biodiesel made using blended edible oils and the weakening of palm oil’s competitiveness following the surge in CPO prices.

The heat from falling crude oil prices had caused many O&G industry players to aggressively adjust their business models or develop innovative ways to overcome the downturn, simmering interest in O&G exploration and production activities as well as changing trade and shipping requirements. Similarly, our O&G Division operated under challenging circumstances during the year but remained resilient with revenue of RM626.17 million, compared to RM569.78 million in 2015 as our marine vessel operations under E.A. Technique (M) Berhad ("EA Tech") continued to deliver strong results. However, pre-tax profit was visibly lower at RM21.03 million halved from 2015's level of RM48.34 million, as we had to be contend with title margin and higher cost.

Faced with a weaker local currency, the Intrapreneur Ventures Division successfully cut expenses through cost containment measures as well as by turning around several loss-making ventures and minimised cash burn by abandoning unsuccessful ideas.

For the year under review, Intrapreneur Ventures generated RM57,61 million in revenue, just a tad off the preceding year’s RM64.06 million.

Clearly this is one of the tougher years that Kulim had to face and collectively, these factors weighed heavily on the Group’s bottom line which led to a 49.14% decline in pretax profit in 2016 to RM59.92 million, from RM117.80 million previously.

A more detailed review on the financial and operating performance will be covered under the “Management Discussion and Analysis” section in this report.
Kulim continues to place significant emphasis on our people and to adhere to stringent sustainable development principles in managing our resources, both of which are our valuable assets, and I am pleased to note that our business decisions always consider the needs of our future generations and our stakeholders.

The resource of nature and the resourcefulness of our diverse workforce have brought us to where we are and naturally it is our responsibility to reciprocate by treating all employees with fairness and dignity and playing an active role in preserving the environment.

Among our key priorities is creating a safe and healthy work environment, where Kulim managed to achieve a zero fatality record in 2016 with its on-going culture of ‘safety first’ as well as an improvement in Lost-Time Accident (“LTA”) rate to 3.51 in 2016 from 6.82 previously, due to consistent training and strict supervision on occupational safety and health.

Conserving biodiversity remains close to our hearts and Kulim continues to play its part in maintaining natural habitats and wildlife, both at and beyond the boundaries of its estates and in cooperation with the authorities and outgrowers. This year also saw Kulim continued to support the latest edition of the Raja Zarith Sofiah Wildlife Defenders Challenge 2016 which kicked-off in December 2015 with the theme - Symbiosis within Mangrove Forests and Eco-Development.

We took a step further in 2016 towards achieving our medium term goal of reducing chemical usage, which is one of our water conservation efforts, by eliminating the use of glyphosate and paraquat in plantations and implemented in its place the Integrated Pest Management system.

To address climate change and to reduce carbon footprint, Kulim has invested in a couple of biogas plants at its oil mills to produce renewable energy from methane generated by the waste product Palm Oil Mill Effluent (“POME”). To comply with international standards, our mills have also obtained the International Sustainability and Carbon Certification (“ISCC”) as well as the Halal certification and we continue to place significant importance on the Roundtable on Sustainable Palm Oil (“RSPO”) Certification by meeting sustainable standards and complying with RSPO Principles & Criteria (“RSPO P&C”) for Sustainable Oil Palm production.

Aside from being environmentally conscious, long-term sustainability also rests on our ability to work harmoniously within the social and environmental settings and in close cooperation with our stakeholders as well as the ability to provide sustained returns to our shareholders. This is achieved through stakeholder engagements where we listen to their needs and endeavour to build trust-based relationships, and through socially-responsible actions reciprocate by giving back to our stakeholders.

This is the crux of our theme: “Resourceful. Reciprocal. For a better future”.
We enter 2017 with clear immediate priorities as we gear up for growth with confidence and the commitment of our people, set goals for a better future with the strategic initiatives that we have mapped out.

Kulim begins a new chapter following its privatisation, defining a new perspective for the Group as part of the larger JCorp Group to contribute to the state and national economic growth whilst maintaining sustainable business growth and improving the wellbeing of the community through business success and corporate responsibility undertakings.

To maintain its position as a competitive, profit-generating and highly-regarded business entity, which is also a vision of JCorp, Kulim will continue to find its core activity in the Plantation business with added contribution from the Indonesian estates.

We will also continue with our replanting efforts to ensure continuous improvement in future yields. Further research and enhancements in best practices for sustainable development should also improve our efficiency and cost management going forward as we continue to invest in our people and in newer technologies.

We are convinced that our forbearance in the upstream O&G venture will pay off in the coming years as the prospects looks promising and we are staying on course with our marine vessel operations as the industry is poised to see relatively more stable oil prices.

Although relatively small in size, the Agrofoods sector has much growth potential and agro industries not only generates employment and income opportunities but also contributes to enhancing the quality of farm products in an environmentally-friendly and sustainable manner.

Hence, the productive partnerships and the potential for further growth of our Agrofoods Division, further aided by the government’s incentives to promote agro industries, will be yet another area of interest.

We have maintained positive momentum and plans are afoot to upscale the cattle project due to higher local demand for beef and in support of the national food security programme. We are also expanding the planting of our pineapple – Melita, amid the increasing taste for the sweet and juicy tropical fruit, which has high marketability worldwide.

Property development and value realisation will feature in our Housing Project at REM Estate involving the construction of 928 homes in two (2) phases.

Phase 1 comprise 457 units while Phase 2 will see the construction of 471 units. We are pleased with the progress thus far, with the earthworks for Phase 1 completed on 13th April 2016 and the ongoing construction to be completed by mid-2017. Construction of the second phase is slated for completion in 2018.

Although we remain cautious about the strength of the local currency and its impact on our operations, we believe that our efforts on better cost control and greater efficiency will help to mitigate the risks.

Overall, we expect 2017 to be a satisfactory year for Kulim.
It is the hard work, enthusiasm, dedication and commitment of our people that enables us to continue to deliver superior business performance. On behalf of the Board of Directors, I wish to recognise and thank each and every employee and worker in our organisation who has contributed to Kulim’s development and growth, for your untiring efforts and commitment throughout the year.

Our deepest appreciation also goes to our business partners, associates, consultants and the relevant government authorities in Malaysia and Indonesia, for your understanding and support in realising our goals.

We thank you, our shareholder – Johor Corporation, for its trust in us and for the support extended to us, giving us the strength to perform our best and to make a difference in all that we do.

I wish to thank the Board of Directors for its contribution and support as well as playing an important role in setting strategies to steer the Group through these challenging times and working closely with the management to achieve Kulim’s vision. I am also pleased to announce that Zulkifly Zakariah has been appointed as Executive Director of Kulim on 1 January 2017. He has served as the Vice President of Estate Operations since January 2013 and prior to that, as the Regional Head for Kulim’s plantation operations in Northern Johor, Malaysia. He has been with the Company since 1980. With over 35 years of experience, I believe Zulkifly will be able to lead the Group to greater heights and I look forward to working with him as we turn the page to begin a new chapter on Kulim’s future.

We are proud of the quality, commitment and capability of our management under the stewardship of Ahamad Mohamad as the Managing Director, who has since 1994 nurtured Kulim from a small plantation firm into a wellknown international player in the palm oil industry, guiding the Group past various hurdles and triumphs through which it has emerged stronger each time. After 23 years at the helm, Ahamad has now moved to a new role as the Corporate Advisor to Kulim, where we are confident that he will continue to support the Group’s success.

A special note of appreciation goes to the outgoing Executive Director, Abdul Rahman Sulaiman who retired on 31 December 2016, and the Independent Non-Executive Directors - Tan Sri Dato’ Seri Utama Arshad Ayub, Tan Sri Datin Paduka Siti Sa’diah Sh Bakir, Datuk Haron Siraj, Dr. Radzuan A. Rahman and Leung Kok Keong, whose terms ended on 1 October 2016 and Rozaini Mohd Sani who resigned on 1 March 2017, all of whom have contributed significantly to the Group’s development. I also take this opportunity to congratulate Mohamad Saleh Mohamad Yusof and Wan Su Ali who were appointed to the board as Non-Independent Non-Executive Director on 1 March 2017. We are also grateful to Dr. Radzuan A Rahman for agreeing to be re-appointed to the Board on 16 January 2017 as an Independent Non-Executive Director to chair Kulim’s Audit Committee, which reflects our continuing commitment to uphold good corporate governance even as a private entity.

Last but not least, my heartfelt gratitude extends to all our stakeholders for your continued support and contribution, both big and small, for with your cooperation, we shall be able to face the future with renewed confidence having better positioned ourselves to meet customers’ emerging needs as well as improved delivery and competitiveness through our socially and environmentally responsible approach.