Dear Shareholders,

The year 2018 could be best described as the year of testimony of our sustainability and strategic plans.

Q: How would you describe the year in review?

ED : The year 2018 could be best described as the year of testimony of our sustainability and strategic plans. Albeit the falling prices, the negative campaign on oil palm and the oversupply of CPO, the Plantation Division remains undeterred and will continue to be the main thrust of the Group.

Total FFB produced by the Malaysian operations decreased by 7.57% to 919,844 tonnes from 995,129 tonnes in the previous year, while average CPO prices declined by 18.41% to RM2,327 per tonne compared to RM2,852 per tonne previously.

The CPO prices trended lower in FY 2018 due to the surplus of palm oil production in the industry and the reduction in CPO export volume to major countries.Nevertheless, we managed to maintain our actual average selling price above the MPOB’s average prices which stood at RM2,239 per tonne in 2018.

From an overall Malaysia’s industry perspective,despite the price currently being at its lowest level, the import of CPO to Malaysia has increased by 51.31% to 841,452 tonnes in 2018 compared to 556,095 tonnes in the previous year. This peculiar event has definitely contributed to the highest ever stock pile towards the end of 2018, thus putting a tremendous pressure to the CPO price. (Source: MPOB Statistic 2018)

On an encouraging note, our Oil and Gas (“O&G”) Division as well as Intrapreneur Venture (“IV”) Division both posted record improvements in terms of their contribution towards Kulim Group’s PBT in FY 2018. Meanwhile, the contribution of Agrofood Division to the Group’s revenue and PBT remained relatively small but we expect it to gradually increase over time.

The Plantation Segment remained our main cash cow, contributing RM843.68 Million or 60.80% of the Group’s revenue.

Q : Kulim has undertaken several corporate exercises in FY 2018. Can you elaborate more on this?

ED : The Group has implemented various corporate exercises in 2018 as part of our efforts to strengthen our core competencies. On 22 June 2018, Kulim obtained the approval from the Government of Indonesia for our POD in the SWBB PSC in the West Sumatera Province. The PSC involving Kulim’s wholly-owned subsidiary, Kulim Energy Nusantara Sdn Bhd (“KENSB”), with two (2) subsidiaries of PT Citra Sarana Energi (“PT CSE”) namely, PT Rizki Bukit Barisan Energi (“PT RBBE”), formerly known as PT Radiant Bukit Barisan E&P (“PT RBB”) and PC SKR International (“PC SKR”), is for the exploration and development of an onshore O&G field in the SWBB block. With this approval, Kulim is targeting to focus on the completion of the Conditional Share Subscription and Purchase Agreement (“CSSPA”) which is expected to be finalised by the fourth quarter of 2019.

On 30 June 2018, Kulim has also ceased the operation of Microwell Bio Solutions Sdn Bhd (“MBSSB”), as part of our move to further strengthen our IV Business which include exit from non-performing businessess, harvest on matured ventures and divest some of our investment in order to optimise returns for the Group.

The year 2018 also witnessed the sail away of two (2) new Fast Crew Boats (“FCB”) owned by our subsidiary, E.A.Technique (M) Berhad (“EA Tech”), namely M.V. Nautica Gambir and M.V. Nautica Langsat on 17 August and 28 September 2018 respectively. These two (2) new vessels are in the Offshore Support Vessels (“OSV”) category of FCB, where they were to be deployed for new contracts that were secured by EA Tech. This development is expected to contribute positively to the Group in the current financial year and beyond.

The disposal of 95% equity in Pinnacle Platform Sdn Bhd (“PPSB”) held by EPA Management Sdn Bhd to our IV company, Extreme Edge Sdn Bhd (“EESB”) was completed on 1 November 2018. EESB intends to focus on expanding the business through Merger and Acquisitions (“M&A”) and business diversification.

Subsequently on 30 November 2018, the Group completed the acquisition of 49% equity in Pristine Bay Sdn Bhd (“PBSB”), held by Johor Land Holding Sdn Bhd making the latter a wholly-owned subsidiary of Kulim which now fully controls the future direction of PBSB.

On 20 December 2018, Kulim completed the disposal of Asia Economic Development Fund Limited (“AEDFL”) to Johor Logistics Sdn Bhd (“JLog”). The disposal is in line with Kulim’s intention to streamline our business activities and assets base by focusing on the core palm oil business.Through this exercise, the shareholders will have a direct shareholding in AEDFL, thus enabling them to determine the future direction of AEDFL and benefit directly from any future corporate actions and exercises involving the company.

Q : How did Kulim perform on the financial front?

HOF : There was a marginal drop in revenue from RM1.53 billion registered in 2017 to RM1.39 billion in 2018. However, our PBT increased to RM71.04 million from RM34.42 million posted in the previous year. PBT was mainly contributed by plantation segment amounting RM49.97 million and O&G Segment due to reversal cost of EPCIC project by EA Tech amounting to RM70.76 million. However, the decreased in revenue was mainly due to decrease in average CPO price of RM2,327 per tonne in 2018,against of RM2,852 per tonne registered in the previous year and no revenue contribution from EPCIC project which was completed in 2017. Notwithstanding the results and challenges, we were able to deliver RM150 million dividend to our shareholders.

Q : Which business division was the biggest contributor to the Group’s revenue and profitability?

HOF : For FY 2018, the Group’s Plantation Segment remained as the main revenue contributor with RM843.68 million or 60.80% of the Group’s revenue. While, FFB production declined to 919,844 tonnes from 995,129 tonnes in 2017, CPO production rose year-on-year to 306,484 tonnes in FY 2018 from 299,981 tonnes previously. Production of PK however, slipped marginally to 78,995 tonnes in 2018 from 79,071 tonnes in the preceding year. The Group’s Malaysian operations reported an average CPO price of RM2,327 per tonne for 2018 compared to RM2,852 per tonne for the previous year, albeit still higher than MPOB’s average selling price of RM2,239 per tonne in 2018. The average price of PK also decreased to RM1,792per tonne, against RM2,427 per tonne registered in 2017

Q : How would you describe the performance of Kulim’s other business segments?

HOF : Various corporate moves have been taken to strengthen our IV Business, which has continued to strengthen as reflected in another favorable set of financial results in 2018. For FY 2018, the Group’s IV Segment generated revenue of RM47.93 million, a decreased of 14.76% from RM56.23 million reported in 2017. However PBT has increased from Loss Before Tax (“LBT”) of RM2.02 million in 2017 to PBT of RM1.24 million in 2018.

For FY 2018, Kulim’s O&G Division has posted a revenue of RM469.92 million, which increased by 14.81% compared to RM409.32 million achieved in previous year. However, as compared to LBT of RM134.50 million recorded in 2017, the Division has posted a PBT of RM87.14 million in 2018, an improved performance of 164.79%.

Q : How would you describe Kulim’s Financial Position for FY 2018?

HOF : Kulim’s financial position remained stable in 2018, with a positive cash balance and net gearing ratio of 0.43 times. Our total borrowing rose slightly to RM1.88 billion as of December 2018 from RM1.76 billion as of end-December 2017, while our cash balance remained relatively healthy at RM252.45 million as at the end of FY 2018, compared with RM325.47 million in 2017. During the year under review, the Group saw an increased in its finance cost due to higher interest rate charged for borrowing with floating rate, revolving credits, as well as borrowing denominated in other currencies as a result of the changes in foreign exchange rates.

Q : Kulim’s performance in 2018 was indeed commendable considering the challenges faced during the year in review. Can you please share with us some of the achievements or highlights recorded by the Group in FY 2018?

ED : We are pleased to note that despite the challenging business environment of 2018, the Group continued to record remarkable achievements which include: 

  • Achieved an Oil Extraction Rate (“OER”) of 21.00% anda Kernel Extraction Rate (“KER”) of 5.41%.
  • Successfully lowered the cost per tonne of FFB to RM279.78 compared with our target of RM286.76, resulting in savings of 2.43%. Correspondingly, cost per mature hectare was lowered to RM6,192.82, leading to 1.03% savings.
  • The commissioning of Sindora Biogas Plant on 16 January 2018. Received the Identity Preserved (“IP”) Certified Mills recognition for Palong Cocoa POM on 20 April 2018, which subsequently obtained the International Sustainability & Carbon Certification (“ISCC”) Certified Mills on 9 May 2018.
  • Disbursed a total of RM18.43 million as our contribution to the well-being of the local communities in which we operate.
  • Winning no less than five (5) awards for 2018.

Q : Earlier, you mentioned about various challenges faced by the Group during the year that have impacted Kulim’s performance. Please elaborate.

ED : While the Group continued to face significant headwinds in 2018, we were able to weather the challenges on the back of solid corporate strategies and strong business acumen that have already been laid earlier by our Management. Such challenges include the fluctuations in CPO and PK prices, weather uncertainties, stagnant growth potential and escalating cost for our Malaysian operations.

We also had to diligently thread through the changes in exchange rate, while managing our gearing as well as the interest rates. Changes introduced by the Government, as well as rising operating costs and shortages in manpower, were also among the scenario that we had to face in FY2018. Another challenges that have been implemented on 1 January 2019 is the minimum wage to be paid to employees which increased from RM1,000 to RM1,100.

On the international front, one of the biggest challenges faced by us and other local industry players during FY 2018 was the smear campaign against palm oil from the EU. In addition, we also had to deal with stringent regulations and requirements like the ones set by RSPO, as well as those imposed by the new markets. 

HOF : Another challenge faced by the Group during the FY 2018 was the adoption of new Malaysian Financial Reporting Standards (“MFRS”) in the preparation of Financial Statements among others, MFRS 1, MFRS 141, MFRS 9 and MFRS 15 which have significant impacts on the Group’s financial position, financial performance and cash flow.

Q : Moving forward, what is the expected business outlook for Kulim in the coming year?

ED : By strengthening our core competencies and solidifying our business strategies, we remain confident of the group fundamental strengths and are cautiously optimistic of Kulim’s prospect for FY 2019. Specific strategies have already been outlined for each of our business division to ensure that we will be able to weather any challenges and improve our performance in the near future. 

Plantation: We aim to strengthen our core plantation business by boosting our planted area and concurrently increase the annual CPO production by the Group. Expanding beyond our current planted area which stood at 55,604 hectares, we will be able to enhance our revenue through involvement in trading, midstream and downstream of palm oil activities.

Intrapreneur Venture: We aim to sustain our Group’s IV Companies performance and plan to exit from non-performing businesses, harvest our matured ventures and divest some of our investments in order to optimise returns for the Group

Oil & Gas: On 22 June 2018, Kulim has obtained the POD approval from the Government of Indonesia for the SWBB PSC. Hence, now is a timely opportunity for Kulim to realise our investment in Indonesian O&G business at an attractive premium above our initial cost of investment. This will be done via monetisation through a Joint Venture (“JV”) with a third party or by taking the “Cash Out” path via dilution of KENSB’s equity in PT CSE for a huge potential return after development.

We will be taking into account these potential opportunities mentioned above in determining Kulim’s future business direction, whereby they are expected to present exciting new possibilities to be explored particularly in generating new revenue streams for the Group.

Agrofood: Following the positive market response towards our MD2 pineapple, we plan to expand our pineapple planting and supervise 12 Agropreneurs under the B40 category for the MD2 pineapple cultivation project at Tanah Abang, Mersing, Johor with a planted area spanning 48.58 hectares in collaboration with Malaysian Pineapple Industry Board. For cattle project, we are targetting to expand the napier planting at Tebing Tinggi, Segamat with a target planting area of to 12 hectares in 2019 and to produce napier pellet.

Property: The construction works for Kulim’s housing project at Taman R.E.M, Kota Tinggi, which consisted of 457 units, have been completed in December 2018. We aim to launch the sale of the houses by mid-2019. Moving forward,the Group plan to unlock the value of its property business through the monetisation of our assets and crystalize the values of land by conversion of our plantation estate into property development.

Q : After “Defining New Perspectives” in FY 2017, the Group has chosen “Strengthening Core Competencies” as the theme for this year’s annual report. What is the rationale behind this choice? 

ED : “Strengthening Core Competencies” refers to Kulim’s commitment to our strategic path of strengthening our core plantation business by boosting our total planted area in Malaysia and Indonesia. Kulim continuously strives to realise the potential and value of its businesses by evaluating numerous initiatives, business opportunities and proposals which involve the Group or its subsidiary should the right conditions and opportunities come our way in order to enhance Kulim’s growth and value over the long-term.

Q : Speaking of the smear campaign against palm oil in Europe, what are the counter measures that have been taken by Kulim, as well as local industry players as a whole and the Government to mitigate this negative perception?

ED : Many European nations have categorised palm oil producers in Southeast Asia as the drivers of deforestation and unsustainable agricultural practices, such as Norway which has recently decided to phase out the use of palm oil based bio fuels. Our Primary Industries Ministry has already responded by urging Norway to review its policy on this matter.

Malaysia has also adopted numerous sustainable practices and other national standards throughout the palm oil value chain. As for Kulim, we were among the first companies in Malaysia to become a member of the RSPO, the global standard that is an assurance that the palm oil is produced without causing harm to the environment or society.

Kulim also has completed the MSPO Audit by end-2018 and targeted to receive our MSPO certification by March 2019.Covering seven (7) main principles, MSPO certification was first launched in 2015 on a voluntary basis and will become mandatory for all Malaysian palm oil producers by 2019.

Q : Kulim’s strength in weathering the business challenges are indeed remarkable. Can you share with us the “secret sauce” behind the Group’s resilience?

ED : Benefits of Sustainable Palm Oil (“SPO”) Premium – The successful attainment of SPO certification will further enhance the Group’s reputation globally, particularly on its awareness and proactive measures on environmental issues and help it to be a front runner in the global supply chain. Sustainability premiums could become an important contributor to the Group’s margin in future, given the ongoing international scrutiny and pressures in this regard. 

Cost Management – We remain resolutely focused on managing our cost of production including re-negotiation of fertilizer prices, fruits recovery and beating our own budget estimates, to maximise margins and profitability, while at the same time abiding by the principles of sustainability.

Strong R&D Support – We continuously strive to use the latest technology and know-how in agronomy, chemistry, seed production, plant breeding, biotechnology and crop protection to optimise our production.

Enhancing Mechanisation – The Group has progressively stepped up its mechanisation and automation programme to reduce reliance on manual labour and undertake continuous improvement in the harvesting activity of oil palm, which is expected to increase efficiency and productivity.

Q : Please provide a brief “SWOT” ( Strength, Weaknesses, Opportunities, Threats) of Kulim

ED : Corporate Swot for Kulim as follows:

Q : Kulim has always emphasized on Human Capital Development in its effort to maintain a solid business performance and realising its corporate aspirations. Can you share with us the human capital initiatives that have been undertaken by the Group in FY 2018?

ED : Kulim is determined to foster a workplace culture and environment that attracts, retains and develops quality talent so that they can reach their full potential and deliver value to our stakeholders.

Towards nurturing skill development and improving job specific competency, we continuously encourage interested employees to pursue professional qualifications by established bodies such as the Association of Chartered Certified Accountants (“ACCA”), Chartered Institute of Management Accountants (“CIMA”) and Malaysian Institute of Accountants (“MIA”), as well as technical courses through collaboration with the Johor Skills Development Centre or PUSPATRI.

We are also involved in the Johor Corporation Leadership Programme (“JLP”) which aimed to encourage and promote the career growth of high potential talents within the Group. JLP is a two (2)-year structured leadership capacity programme that exposes its participants to business challenges in a variety of scenarios, where they have the opportunity to gain and share leadership experiences. 

Q : Being a responsible corporate citizen also means continuously having active engagement with its various stakeholders, including the public. Can you tell us some of the programmes implemented by Kulim in 2018 to build a closer connection with the public and the members of the local communities?

ED : Kulim strive to have a positive impact on the well-being of our surrounding communities. Taking an active role in the community has always been central to our core values,identity and our business strategy of putting people first.We play our part in responding to the needs of society and sharing our success to help improve the quality of life in the community.

Our various engagements with the local community include extending financial support to our adopted schools as well as schools which are located within our operating units area, by supplementing their students’ education with tuition classes,motivational courses, educational trips, international exhibitions and competitions and also contributing to improve the school infrastructure. At Kulim, we also planned to strengthen and enhance our Corporate Responsibility(“CR”) programme and activities for the local community by 2019.

Q : Last but not least: What would be your key message to all Kulim shareholders and stakeholders out there? What can they expect in the year 2019?

ED : Kulim will continuously deliver sustainable long-term returns for our shareholders and deliver long-term values to our stakeholders. As a dynamic entity, Kulim is constantly evaluating its portfolio to maximise value not only to our shareholders but for all our stakeholders through providing rewarding careers to our people, fostering mutually beneficial relationship with our business partners, caring for the society and the environment in which we operate and continuously contributing towards the progress of our nation.