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Market Dateline PP 7767/09/2011(028730)

RHB Research Institute

RHB Equity 360°

6 October 2010 (Plantation, QL, Top Glove, IJM; Technical: Mulpha)

Top Story : Plantation – The battle of the giants – IOIC vs. KLK Neutral
Sector Update
- In YTD 2010, the share price performance of big-cap plantation stocks has been relatively dismal,
compared to the KLCI. Up to 5 Oct, the KLCI has risen 15.4% YTD, Sime Darby has fallen 5.5%, IOIC has
risen 0.4% and KLK has risen 3.6%. We believe that the share prices of these two big-cap stocks are due
for a rerating on the back of continued liquidity in the market and given our view that average CPO prices
are expected to be higher on a yoy comparison in 2011.
- We compare IOIC and KLK on a qualitative and a quantitative basis. From a quantitative perspective, IOIC
is the winner, given its higher productivity and efficiency and on a qualitative perspective, we believe KLK is
the overall winner, given its better corporate governance as well as its improving corporate transparency
and investor access.
- We note that IOIC historically trades at a premium to KLK, of about 1-2x PE, most likely due to its superior
operational and qualitative efficiencies. At current prices however, we highlight that the discount between
IOIC and KLK is wider than the historical average, at about 2.5x, which we believe, could mean that KLK is
relatively more undervalued than IOI at the moment. Going forward, we believe the valuation gap could
narrow, as KLK improves its operational efficiencies, as its plantation estates head towards prime age. As
such, our top pick for the sector remains KLK, as we believe that although it is not the most efficient
operationally, it has the biggest potential in terms of operational efficiency improvement, while valuations
remain inexpensive, trading at a larger-than-deserved discount to IOIC currently.
- Maintain Neutral on the plantation sector as a whole. For IOIC and KLK, we maintain our Outperform calls
with our SOP-based target prices of RM6.75 and RM22.05, respectively.

Corporate Highlights

QL : Exciting prospects for palm oil division Outperform

Briefing Note
- QL’s core focus in the briefing was its palm oil division’s prospects and how its recently-announced
acquisition of a 40.51% stake in Boilermech would complement the division.
- QL’s commercialisation of its palm biomass pelletising system would begin once its Empty Fruit Branch
(EFB) treatment and pelletising plant in Tawau is completed, scheduled to be at end-2010.
- Assuming utilisation rate of 70%, selling price of USD80-90/MT (coal prices are currently at USD90-100
levels), and an exchange rate of RM3.10/USD, we estimate that the palm pellets will contribute
approximately RM7-8m towards QL’s topline.
- For QL, we understand that its biogas power generation plant will be used mainly to power its palm oil mill
and pelletising plant, saving on energy costs thus giving rise to wider margins. Currently, out of the
approximately 400 palm oil mills in Malaysia, less than 10% utilises biogas power generation.
- However, the real palm oil story is in the integration of all three to develop a new technology system for
zero-waste renewable energy. We understand that QL’s ultimate aim is to install its integrated technology
for other palm oil millers.
- We are leaving our forecasts unchanged despite the potential revenue boost from its palm oil pellets,
biogas and boiler division, as we prefer to wait for the pellet plant to be completed end of this year before
we input any contribution from the pellets. Maintain Outperform with unchanged fair value of RM5.41.

Top Glove : Medi-Flex ends the year in black Underperform

Company Update
- Medi-Flex (Not Rated) yesterday reported full-year core net profit of RM6.6m, a turnaround from a core net
loss of RM4.6m in FY09. We believe the improvement was largely due to higher utilisation rates, which
resulted in EBIT margin expansion notwithstanding higher latex cost and weakening US$ vs. RM yoy.
- HoH, revenue rose 17.0% on the back of higher average utilisation rate of 90% vs. 85% in 1H10, while
2H10’s net profit fell by 25.2% hoh as a result of margin contraction due to the time lag in passing on high
latex cost and weakening US$.
- We remain cautious on the near-term outlook for rubber glove manufacturers on the back of: 1) slow down
in demand for rubber gloves as customers opt to run down their inventory levels due to high latex price; 2)
high latex price; and 3) weakening US$ against RM.
- We have left our earnings forecasts unchanged for now.
- We retained both our fair value of RM5.30 (based on target CY11 PER of 12.5x) and Underperform call.

IJM : Raising stakes in two Indian units Underperform (down from MP)
News Update
- IJM has proposed to acquire from MTD and WCT ordinary and preference shares of CIDB Inventures and
Swarna Tollway for RM93.5m, raising its stakes from 34% and 35% to 78.1% and 76.4% respectively.
- CIDB Investures is a construction company with a 30% stake in Swarna Tollway while Swarna Tollway is
the concessionaire for two road sections in Andhra Pradesh, India. Both companies were loss-making.
- We believe the reasons for the acquisitions are tactical. A stronger control over the assets will give IJM a
lot more flexibility when it comes to M&A exercises, be it the eventual disposal of the assets, or the
bundling with other assets for IPO.
- Impact on earnings is immaterial. Downgrade to Underperform as valuations have become unattractive.

Technical Highlights

Daily Trading Strategy : Short-term trading sentiment returned to positive…

- With a timely rebound on the FBM KLCI back to above the 10-day SMA of 1,463, the short-term trading
sentiment has returned to positive.
- While we expect jitteries ahead due to the mixed technical momentum readings, a further rebound towards
the Sep high of 1,479.59 could be underway, if it can acquires a confirmation candle today on the back of
the overnight rally in the Wall Street.
- In other words, the FBM KLCI must remove 1,479.59 to confirm a further rally towards the higher technical
gap near 1,490.5 – 1,497.64 and the psychological level of 1,500.
- On sustain follow-through buying momentum, the index will march higher to the all-time high level of
- Clearly, the immediate support level is at the 10-day SMA of 1,463, and the critical level of 1,450.

Daily Technical Watch: Mulpha – Ready to extend its upside to Jul’s high of RM0.485 and RM0.52…
- 10-day SMA: RM0.414
- 40-day SMA: RM0.4092
- Support: IS = RM0.395 S1 = RM0.27
- Resistance: IR = RM0.52 R1 = RM0.66 R2 = RM0.885

Bulletin Board

Co/Sector News Impact Recom

Gaming Several international private equity firms and a Neutral. The change of hands of Tanjong’s N
consortium led by the Cheng family have gaming business would not have any impact on
expressed keen interest to acquire Tanjong Plc’s the NFO industry per se, given that it is merely a
gaming business although the company change in ownership and would not affect the
controlled by T. Ananda Krishnan is still weighing operations and type of games being offered.
its options on whether or not to divest the prized
asset valued at some RM2.3-2.5bn. The other
assets up for sale in the post-privatisation of
Tanjong include the cinema operation and
Tropical Islands in Germany, with the combined
value of these businesses believed to be about
RM2.8bn. While divestment is an option for
Tanjong, another would be to tie up with some
other gaming-related party by partially selling its
interest in the gaming business. (The Star)
Important Dates

Company Entitlement details Ex-date Payment date

New entitlements
YTL Cement 10th interest payment on 10-year ICULS 2005/2015 21-Oct-10 10-Nov-10
Plenitude First and final single tier tax exempt dividend of 15 sen 29-Oct-10 12-Nov-10

Going “ex” on 7 Oct

Jadi Imaging Holdings Issue of free warrants on the basis of 1-for-2 7-Oct-10 -
Yi-Lai Interim single tier dividend of 3 sen 7-Oct-10 8-Nov-10

...For more details, see individual reports attached


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