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PP 7767/09/2010(025354)

10 March 2010
Corporate Highlights
Malaysia RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
MARKET DATELINE Sector Upda te Company No: 233327 -M

10 March 2010
Plantation
Recom : Overweight
All For CPO Prices Crossing RM3,000/Tonne (Maintained)

Table 1 : Plantation Sector Valuations


Fair EPS * EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
KLK Sep 16.64 19.50 97.8 125.1 38.1 28.0 17.0 13.3 3.0 13.7 3.0 OP
CBIP Dec 2.75 3.30 41.2 49.7 42.6 20.6 6.7 5.5 1.4 5.4 6.2 OP
IOI Corp Jun 5.46 6.65 27.9 31.5 -13.0 13.0 19.6 17.3 3.9 17.2 2.2 OP
Sime Darby Jun 8.69 9.85 40.7 51.6 8.5 26.8 21.3 16.8 2.3 15.4 2.5 OP
IJMP^ Mar 2.46 2.05 13.8 16.7 34.8 21.3 17.8 14.7 1.7 14.1 2.0 UP
Genting Plnt Dec 6.52 5.85 40.3 46.8 34.0 16.0 16.2 13.9 1.8 14.6 1.7 UP
Sector Avg 5.1 22.0 19.5 16.0 2.7
^ FY10-11 valuations refer to those of FY11-12 # Formerly known as Asiatic *Normalised

♦ All in view of prices crossing RM3,000/tonne mark. We came away Chart 1. CPO vs soyoil and rapeseed
from the first day of the 2010 POC (Palm and Lauric Oils Conference) with oil prices
US$/tonne

a “bullish vibe”, as three of the speakers who made price forecasts had 1,700
CPO Soy Oil Rapeseed Oil

relatively bullish expectations, projecting CPO prices to cross the 1,500

RM3,000/tonne mark this year. Price forecasts were given by Ms. Anne 1,300

Frick from Prudential Bache Commodities LLC, Mr. Nagaraj Meda, from 1,100

Transgraph Consulting Pvt Ltd, a commodities consulting company based 900

in India and from Mr Dorab Mistry, from Godrej International. 700


500

Projections admittedly more bullish than our expectations. We 300

admit most of the price forecasts given today were slightly more bullish 100

than our expectations. While we believe it is possible for CPO prices to


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Chart 2. CPO vs crude oil prices


touch or cross the RM3,000/tonne mark, based on the current bullish 160 1400

momentum, we do not discount the potential for prices to fall back down 140 Correlation factor of 1200
0.9x in 2007

in the normal seasonal peak period in 2H2010. Our forecasts are based narrowed to 0.75x in

C P O s p o t p ric e s (U S $ /to n n e )
C ru d e o il p ric e s (U S $ /b a rre l)

120
1H08, and rose again 1000
Correlation factor to 0.95x in 2H08.

on the assumption that there is no impact from weather anomalies like El 100 started normalising to
0.7x from Dec-08, but 800
rose again from Sep-

Nino, given that it would be difficult to know if El Nino has really had an
80
09 onwards to close
to 1x 600
60

impact until six months after the fact, which in this case, would fall during 40
400

the peak production period for CPO in 3Q2010. We believe Dorab Mistry’s 20 200

projection for stronger CPO prices in 2H2010 would only come through if 0 0
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n -1

the impact of El Nino on production is relatively severe. As such, we


c

c
Ja

Crude Oil (US$/barrel) CPO (US$/tonne)

maintain our average CPO price assumptions of RM2,500/tonne for 2010


and RM2,700/tonne for 2011. YTD average spot prices of CPO of
approximately RM2,550/tonne is in line with our projection, which
assumes stronger CPO prices in the first half of the year versus the
second half, following the CPO production cycle.
♦ Risks include: (1) a significant change in crude oil price trend; (2)
weather abnormalities; (3) change in emphasis on implementing global
biofuel mandates and trans-fat policies; (4) significant changes in trade
policies of vegetable oil importing or exporting countries; and (5) a faster
or slower-than-expected global economic recovery.
♦ Forecasts and Investment Case. No change to our earnings forecasts.
We maintain our Overweight stance on the sector as a whole and Hoe Lee Leng
reiterate our recommendation for investors to stick with the more liquid (603) 92802184
stocks given the anticipated volatile market conditions in 2010. We hoe.lee.leng@rhb.com.my
maintain our Outperform recommendations on IOIC, KLK, Sime Darby
and CBIP, and Underperform recommendation on Genting
Plantations and IJMP.

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10 March 2010

Palm Oil Conference Notes – Day One

♦ So far, all in view of prices crossing RM3,000/tonne mark. We came away from the first day of the 2010
POC (Palm and Lauric Oils Conference) with a “bullish vibe”, as three of the speakers who made price forecasts
had relatively bullish expectations, projecting CPO prices to cross the RM3,000/tonne mark this year. Price
forecasts were given by Ms. Anne Frick from Prudential Bache Commodities LLC, Mr. Nagaraj Meda, from
Transgraph Consulting Pvt Ltd, a commodities consulting company based in India and from Mr Dorab Mistry, from
Godrej International.

♦ Anne Frick, Prudential Bache Commodities LLC: wide price range of RM2,400-3,300/tonne. Ms Frick
gave a general CPO price range forecast of RM2,400-3,300/tonne for CY2010 with no timeframe given as to when
she expects prices to touch the highs or lows. She believes that vegetable oils are still in the bull phase of the
cycle currently, with one more new high ahead, which based on her projected price range, should be
RM3,300/tonne. This is based on the expectation that palm oil production increase could slow in 2010, while a
temporary reduction in rapeseed and sunseed supplies may boost soyoil use for biodiesel, thus resulting in world
vegetable oil stock usage ratio falling and prices gaining. However, she believes that high prices discourage usage
and encourage production and that eventually vegetable oil prices will enter the bearish phase of the price cycle.
This will then see livestock numbers recovering, demand for protein rallying feedmeal prices and more crushing of
oilseeds, while global production of rapeseed and sunseed would increase on higher plantings.

♦ Mr Nagaraj Meda, Transgraph Consulting Pvt Ltd: short-term range of RM2,000-3,000/tonne. The
second price forecast from Mr Nagaraj is only a short-term forecast, although he does give a long-term price
view. The short-term forecast encompasses the next four to six months, where he sees CPO prices ranging
between RM2,000-3,000/tonne. He expects CPO prices to hit a high of RM3,000/tonne in April/May 2010, but in
3QCY2010, he expects the US$ to start strengthening, resulting in a weakening of CPO prices back to
RM2,000/tonne. The bullish outlook for the short term is based on a similar premise as Ms Frick, where CPO
supply is expected to be tight as a result of the impact of El Nino and the lean supply season, while demand is
expected to be strong, coming from the biodiesel sector and also from India and Pakistan. Mr Nagaraj expects
Malaysian CPO stock to fall back towards 1.6-1.65m tonnes at end-April (from 2m tonnes at end-Jan). Crude oil is
also expected to be a supporting factor and he expects crude oil prices to touch US$90/barrel in the short term,
but to come back to US$60/barrel subsequently. He believes that as long as crude oil stays between US$70-
90/barrel, CPO prices should range between RM2,100-2,700/tonne. As for his long-term price view, Mr Nagaraj
believes that the long-term price trend of palm oil and edible oils looks bullish as a whole, based on his projected
supply and demand projections for 2015 which sees Asia driving demand growth aggressively. His projection
estimates Asia to consume 62% of the total vegetable oil trade by 2015 (from 53% currently), thus resulting in
supply shortages and higher prices overall.

♦ Mr Dorab Mistry, Godrej International: RM2,600-2,800/tonne in Mar-July 2010 and RM2,800-


3,200/tonne in 2H2010. The last speaker of the day, Mr Dorab Mistry, had the most bullish forecast of all the
three speakers yesterday. For the period Mar-July 2010, he projects CPO prices to trade at between RM2,600-
2,800/tonne. Mr Mistry believes the biggest price-making factor of 2010 will be supply, which is under pressure.
He projects global vegetable oil supply to rise by 2.9m tonnes in Apr 10/Mar 11, while global demand is expected
to rise by 6-6.5m tonnes (4.5m tonnes for food and the rest for biodiesel). As a result of this shortage, he
expects vegetable oil prices to rise in order to make biodiesel uncompetitive again in some discretionary markets
(ie. not in the mandated markets) and to curb food demand. Mr Mistry’s forecasts assume that crude oil prices
trade in the range of US$70-95/barrel for most of the year, while he has also presumed that the US$ will remain
strong for the next few months. Despite the strong US$ expectation, he believes that the higher financial demand
for commodities will blunt the effects of the stronger US$ in the short term. In the 2H2010, he expects the US$
to weaken again, thus propelling commodity prices. At the same time, he believes the effects of El Nino will be
felt on palm oil production during this period, while the pressure from the bumper soyaoil crops from South
America will abate as harvests would be completed by Aug 2010. He expects similar price trend for soyaoil,
projecting prices to trade between US$850-900/tonne in the next few months (slightly below current price of
US$910/tonne), but to rise to US$1,000/tonne post-Aug 2010.

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10 March 2010
Forecasts

♦ Projections admittedly more bullish than our expectations… We admit most of the price forecasts given
today were slightly more bullish than our expectations, in that all of the industry experts projected CPO prices to
touch or cross the RM3,000/tonne mark. While we believe this is possible, based on the current bullish
momentum, we do not discount the potential for prices to fall back down in the normal seasonal peak period in
2H2010. Our forecasts are based on the assumption that there is no impact from weather anomalies like El Nino,
given that it would be difficult to know if El Nino has really had an impact until six months after the fact, which in
this case, would fall during the peak production period for CPO in 3Q2010. We believe Dorab Mistry’s projection
for stronger CPO prices in 2H2010 would only come through if the impact of El Nino on production is relatively
severe.

♦ … but CPO price forecasts maintained. As such, despite the more bullish industry expert forecasts, we
maintain our average CPO price assumptions of RM2,500/tonne for 2010 and RM2,700/tonne for 2011. YTD
average spot prices of CPO of approximately RM2,550/tonne is in line with our projections, which assumes
stronger CPO prices in the first half of the year versus the second half, following the CPO production cycle. We
believe fundamental factors like the current seasonally weak CPO production output, the impact of higher
replanting activities in Malaysia over the last two years, the impact of current weather abnormalities, the start of
implementation of biofuel policies in many countries in 2010 and the continuation of favourable trade tariffs, will
continue to support stronger CPO prices in the near term, while financial demand will continue to be one of the
factors governing CPO and crude oil price movements in the medium term.

Risks

♦ Main risks include: (1) a significant change in crude oil price trend resulting in significant movement of CPO
and other vegetable oils prices; (2) weather abnormalities resulting in an over- or under-supply of vegetable
oils; (3) change in emphasis on implementing global biofuel mandates and trans-fat policies; (4) significant
changes in trade policies of vegetable oil importing or exporting countries; and (5) a faster or slower-than-
expected global economic recovery, resulting in a higher- or lower-than-expected growth in demand for
vegetable oils.

Valuations and Recommendations

♦ Overweight stance on sector maintained. We maintain our Overweight stance on the sector as a whole
and reiterate our recommendation for investors to stick with the more liquid stocks given the anticipated
volatile market conditions in 2010. We maintain our Outperform recommendations on IOIC, KLK, Sime
Darby and CBIP, and Underperform recommendation on Genting Plantations and IJMP (see Table 2).

Table 2. Valuation Bases


Fair Value
Company (RM/share) Valuation Methodology

Genting 5.85 Target 14.5x PER CY10 earnings.


Plantations
CBIP 3.30 Target PER of 8x CY10 for the oil mill engineering division and 12x CY10 for the plantation division.

IJMP 2.05 Target 14.5x PER CY10 earnings

IOIC 6.65 Target PER of 18x CY10 for the plantation division, 12.5x CY10 for the manufacturing division and
13.5x CY10 for the property development and investment property divisions (on fully diluted basis).

KLK 19.50 Target PER of 18x CY10 for the plantation division, 12.5x CY10 for the manufacturing division, 13.5x
CY10 for the property division and zero value less potential provisions for the retail division.

Sime Darby 9.85 10% discount to SOP comprising: target PER of 18x CY10 for the plantation division, 15x CY10 for the
energy & utilities division, 13.5x CY10 for the heavy equipment and property divisions and 12x CY10
for the motor and other small divisions.
Source: RHBRI

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Table 3: Impact of every RM100/tonne increase in CPO price

Genting Plantations +5-7%


KLK +4-6%
IJMP^ +5-7%
IOI Corp +3-5%
Sime Darby +4-6%
CBIP +2-4%

Source: RHBRI

Chart 1: CPO Weekly Technical View Point


♦ The Crude Palm Oil futures (CPO) has regained its
strength recently and reclaimed the crucial
RM2,500 level in early Feb 2010.

♦ The CPO closed at RM2,650 after testing a high of


RM2,722 earlier. It registered a small negative
candle on the chart.

♦ Although momentum indicators are showing slightly


exhausted readings, the recent uptrend remains
intact, in our view.

♦ Chances are, it may rechallenge the RM2,760


resistance level and the RM2,800 psychological
level soon, on follow-through buying support.

♦ Upon removal of the RM2,800 level, it will head


towards the RM3,000 - RM3,300 strong resistance
region on extended upside momentum.
IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

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investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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10 March 2010
Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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