Market Dateline PP 7767/09/2010(025354)

RHB Research Institute

RHB Equity 360°

1 April 2010 (Strategy, Market, Plantation, Telecom, Steel, Faber, KPJ, PetGas; Technical: DRB-Hicom)

Top Story : Market Outlook & Strategy 2Q2010 – Volatile market uptrend amid policy normalisation
Strategy Update
- Good prospects of a sustainable global economic recovery despite a number of global issues and
concerns.
- Whilst both the Malaysian economic and corporate earnings recoveries are gaining pace, valuations are
also back to normal levels.
- The market is however still very under-owned by foreign investors and potentially could be re-rate if these
investors turn positive on the country’s economic reforms to bring about a more competitive economy.
- Meanwhile, we expect external events to dominate market movements and any global policy changes will
likely cause the market to be volatile. Our year-end FBM KLCI target, however, remains unchanged at
1,400 or 15x 2011 earnings.
- In our view, any significant weakness in the market is an opportunity to accumulate quality stocks for
longer-term performance as we believe that a global sovereign credit problem will unlikely unfold and the
global economic recovery is more sustainable than feared.
- Stock picking is key. The challenge is to look for Alpha+ stocks, including recovery leaders and quality
cyclicals that have a strong leverage to the economic recovery.
- In our view, the banking sector would continue to benefit from the economic recovery, while pent-up
demand and new applications will likely attract new focus into the semiconductor industry. In addition, a
base tariff review, which coupled with fundamental recovery in electricity demand, should augur well for
TNB in the power sector, while strong data traffic and attractive dividend yields would present good
investment themes for the telco sector.

Market Update

Benchmarking : First quarter review

Market Update
- For the 1Q10, the performance of the FBM KLCI by sector was dominated by the banks (+1.1%-pt increase
in index weighting for the 1Q10), media (+0.22%-pts) and telecom (+1.09%-pts), while the main losers
were gaming (-0.74%-pts), plantations (-0.80%-pts) and power (-0.63%-pts).
- Five out of the six banks in the benchmark index posted strong absolute YTD performance. We reiterate
our view that the sector will be one of the key beneficiaries of the recovering economy.
- Astro as the only media stock in the FBM KLCI outperformed the benchmark index by 37.5% over the
same period due to the privatisation proposal. The stock will likely drop out of the index latest by mid-Aug.
In any case, with a weighting of just 0.81%, we see minimal impact to other sectors.
- Axiata and TM outperformed the benchmark index for the YTD while the mobile players including Maxis
and Digi were relative underperformers. The mobile players may face some near-term concerns of rising
competition but the long-term positive outlook for mobile broadband and data is still intact in our view.
- Some of the big losers were Genting (YTD -13.3% vs. FBM KLCI), Sime Darby (-6.4%), IOI (-5.0%) and
TNB (-8.0%) on concerns that their price catalysts had become stale. This was unjustified in our view, and
we remain positive on these stocks.
- Overall we reiterate our positive view on the market given the economic recovery, although fundamental
stock-picking will remain important in the current volatile market.

Sector Update

Plantation : Smooth or bumpy ride ahead? Overweight

Sector Update
- We believe that the positive basic supply and demand fundamentals would help support CPO prices at a
range of RM2,300-2,800/tonne over the short to medium term. Although based on our CPO price range
expectations, there does not seem to be that much more upside to CPO prices, we believe that in the
current market environment, where volatility in external factors is the norm, CPO prices could undershoot
or overshoot our projected price range. As such, although CPO prices could potentially hit the
 RM3,000/tonne mark again, we believe this may not be a sustainable price target in the medium term, due
to the demand reallocation which would occur in price-sensitive markets like China and India which would
then “re-balance” prices. In the long-term, we believe CPO prices would stay above RM2,000/tonne due to
structural changes.
- We believe the risk of external factors would continue to be the wild card affecting CPO and vegetable oil
prices in the future. Besides the volatilities of crude oil prices, exchange rates and financial commodity
demand, weather uncertainties and the potential impact of El Niño is the “hot” topic of late. Based on
current observations and dynamical model forecasts, El Niño is expected to continue at least through to
May/June 2010. If this does happen, we believe the likelihood of CPO supply being affected is higher, and
this impact would be seen from 3Q/4Q CY2010 onwards.
- We maintain our CPO price assumptions at RM2,500/tonne for 2010, RM2,700/tonne for 2011 and
RM2,500/tonne for 2012. In view of the many external factors and potential volatilities they bring, we
continue to advise investors to keep to the more liquid stocks and to trade the volatilities. We maintain our
Outperform recommendations on IOIC, KLK, Sime Darby and CBIP, and Underperform recommendation
on Genting Plantations and IJMP, with higher target prices for the small and mid-cap stocks

Plantation : USDA planting intentions – concentrating on corn, not soybean Overweight

Sector Update
- According to the USDA planting intentions report, farmers in the US intend to plant up 78.1m acres of
soybeans in 2010, up by a slight 0.77% yoy from the 77.5m acres actually planted last year. This is 0.6%
lower than consensus expectations of 78.55 m acres of soybean. As for corn, intended planting in 2010 is
up 2.7% to 88.8m acres, from the 86.5 million acres actually planted last year. This is 0.4% below
consensus expectations of 89.2m acres.
- We are not surprised by the higher percentage increase in intended plantings of corn vs soybean, given
that the ethanol mandates in the US are being implemented more aggressively now. We note that the
amount of corn that is used to produce ethanol has been increasing steadily over the last few years, from
14% in 2005, to an estimated 33% in 2010.
- Although we note that the planting intentions seem to more often than not turn out lower than actual
planting, we believe the positive impact of the minimal increase in soybean planting and the increasing
preference of corn planting in the US would not be very significant on CPO prices.
- No change to our Overweight call on the sector.

Telecom : Digi unveils iPhone plans Overweight

Sector Update
- Digi announced its iPhone packages yesterday. Basically, Digi will be offering three postpaid plans with
monthly fees that range between RM88 and RM238.
- More importantly, we note that Digi’s pricing for the iPhones does not stray too far from that of Maxis. This
helps ease our concerns that Digi would adopt a more aggressive stand in terms of handset subsidies in
order to push take-up rates.
- Generally, the deal with Apple coupled with ongoing expansion of its 3G coverage should help Digi better
compete and tap into the data revenue market.
- As for Maxis, with the loss of exclusivity, we think Maxis would try to defend its position by focusing on
areas such as network quality, customer service quality as well as offering more mobile content.
- No change to our Overweight stance on the sector.

Building Materials : Japanese and Chinese steelmakers conclude 2Q iron ore benchmark price Overweight
Sector Update
- The world’s top two iron ore producers concluded the 2Q10 iron ore price with Chinese and Japanese
steelmakers at US$110-120/tonne, nearly double the benchmark price in 2009.
- We believe the concluded iron ore benchmark will stabilise global steel prices in 2Q. Also, we believe
domestic steel producers will experience a sharp margin expansion in 1H, as: (1) Most steel producers
managed to stock up raw materials at low prices when prices weakened on seasonal factors in 4Q; and (2)
Steel prices are likely to sustain into 1H.
- We believe global steel prices are likely to take a breather in 2H and price volatility may return. This is
mainly because concerns on overcapacity may resurface.
Corporate Highlights

Faber : Still a good buy Outperform

Company Update
- We have relooked at our FY10-12 earnings forecast for Faber and have made some adjustments:
- We have revised our FY10 effective tax rate to statutory tax rate of 25% but reduced our FY11 and FY12
effective tax rate to 21% p.a., to reflect the higher contribution from UAE which is tax free.
- According to IFRIC13, revenue for property projects can only be recognised upon completion of
construction, instead of progress billing previously. Faber will be adopting the new FRS standards from 1
Jan 2011 onwards, therefore we have maintained our FY10 property forecast and removed our revenue
projections for the property segment. However, FY12 revenue forecast has been increased by 19% to
recognise the total value of completed property projects as guided by the management.
- As indicated previously, we have assumed that renewal of the concession in Oct 2011 will come with a
10% drop in service fees. We have corrected the error in our assumption to reflect the price drop from 1
Nov 2011 instead of 1 Jan 2011. The impact to DCF is minimal.
- Following the above changes, we have revised our FY10 earnings projection upward by 8.3% but reduced
our FY11 numbers by 18.7%. Our FY12 earnings forecast has been raised by 38.5%.
- Our fair value which is based on SOP valuation is maintained at RM3.30. Maintain Outperform.

KPJ : Acquisition of land in Plentong, Johor Bahru for RM7.1m Market Perform (down from OP)
News Update
- Entered into an S&P agreement with JLand Bhd and JCorp for the acquisition of a 3.25 acre land in
Plentong, Johor Bahru, Johor for RM7.07m. Upon completion on the acquisition by 3Q2010, the land will
be developed into a private specialist hospital to be completed by end-2012. Development cost, estimated
at RM54m. Expect commencement of the hospital operations to begin in 2013.
- Purchase consideration deemed to be fair. Overall positive on the deal given that Plentong is a populous
district with an estimated over 500,000 residents covering the towns of Johor Bahru, Permas Jaya and
Pasir Gudang. We expect this hospital to only contribute to the group’s turnover from FY13 onwards and
positively contribute to the bottomline from FY16 onwards.
- No changes to our earnings forecasts. Given the limited upside to our target price of 6% vs. our projected
FBM KLCI return of 9%, we downgrade our recommendation on KPJ to a Market Perform (from
Outperform) with unchanged fair value of RM3.20 based on 14.5x FY10 EPS.

Petronas Gas : New throughput agreement Underperform

News Update
- Petronas Gas (P Gas) announced that that negotiations with its parent company Petronas, on the revised
terms of the gas processing and transmission agreement (GPTA) has been concluded. The revised terms
of its GPTA shall be effective from 1 April 2010 to 31 March 2014.
- We believe the lower RC and FC is compensated by the new CRC as well as zero cost of gas used for
internal consumption. Assuming FY11-13 total gas processed of around 1.02-1.05bn scf, we estimate CRC
for P Gas of around RM890-920m. Based on our sensitivity analysis, the revised terms will lower P Gas’
throughput revenue by 8.6-9.6% on gas processed volume above 2bnscfd.
- We believe upside to throughput revenues (i.e. from flow rate charges) would likely be capped given that:
1) supply curtailment from “rich” fields in Peninsular Malaysia is likely to persist (given most of the fields are
quite old); 2) JDA gas supply is capped at 390mmscfd under Phase 1 of the production sharing contract;
and 3) lower flowrate charges (due to lower GHV).
- We have cut our FY11-12 earnings estimates by 1.1% and 1.7% respectively after factoring in the above
changes. Accordingly, our fair value is nudged down slightly to RM9.72/share (vs. RM10.08/share
previously). Reiterate Underperform.

Technical Highlights

Daily Trading Strategy : Profit-taking pressure increases on the recent high flyers…
- While the FBM KLCI still managed to chalk up marginal gains yesterday, the broader market sentiment has
turned slightly more cautious, amid the constant profit-taking pressure due to the lack of positive surprises
 from the Invest Malaysia Conference opened by the PM Najib Razak on Tuesday.
- In fact, the T+3 and T+4 selling pressure from recent high trading volume at above 1.0-1.25bn shares since
early last week could add pressure to the recent high flyers, which were mostly traded off high yesterday.
- Therefore, the local market may see higher risk of follow-through profit-taking activities going forward,
unless FBM KLCI manages to overtake Tuesday’s high of 1,323.70. Its next immediate hurdle is 1,334.34.
- Nevertheless, we remain confident that the benchmark will find firm supports near the 10-day SMA of 1,309
and the resistance-turned-support level at 1,300 soon.
- Indeed, our medium-term outlook on the FBM KLCI remains bullish, and we expect the index to resume its
bullish momentum towards the medium-term upside target at 1,390, once it clears off the weak holders
from the recent overbought environment.

Daily Technical Watch: DRB-Hicom – Failing to remove RM1.20 will mean a profit-taking pullback soon…
- 10-day SMA: RM1.059
- 40-day SMA: RM1.015
- Support: IS = RM1.05 S1 = RM0.95 S2 = RM0.82
- Resistance: IR = RM1.20 R1 = RM1.39 R2 = RM1.55

Bulletin Board

Co/Sector News Impact Recom

O&G KIC Oil and Gas Group (a private operator of oil
terminals in Westport) has entered into a MOA
with Thailand’s Nathalin Group to form a shipping
trust worth US$200m. The fund will be used to
acquire 22 vessels for the intra-terminals
activities (i.e. logistics and transportation).
(Starbiz)
IOIC IOIC may write back the RM259m in impairment
loss it provided for its Pinnacle property
development project in FY08, as property prices
in Singapore have risen since then. Its Seascape
development project has had a [preview launch
of limited units on Mar 25, with an average selling
price of S$2700/sq ft and more than half of the
units were sold. (Edge Financial Daily)
Maxis Maxis targets to a high single-digit revenue
growth this year, but this would be partly offset by
higher financing cost and margin pressure. Maxis
plans to spend RM1.4bn in capex this year (bulk
on 3G) and around RM1bn thereafter. (Financial
Daily)
TM TM is likely to maintain its existing dividend policy
for FY10 but may consider raising its policy next
year as HSBB capex is expected to peak this
year. Thus far, TM has close to 500 subscribers
for UniFi. (Financial Daily)
Top Glove Top Glove may raise prices if US$ falls and latex Neutral. As we previously mentioned, all glove OP, FV =
cost rises. (BusinessTimes) manufacturers have raised their glove prices to RM15.50
Positive. Key beneficiary include ship builder OW
such as Sea Link. We believe the investment is
largely driven by the improving outlook on the
O&G activities given the stable crude oil prices
as well as anticipation of a gradual uptick in
demand for crude oil.
Positive, as this would add an additional 14-15% OP, FV =
to our net profit forecasts, although it would be RM6.65
considered as an exceptional item. Nevertheless,
the positive response of its preview sale of its
Seascape project is positive, and the pricing is
17% higher than our forecasted assumptions of
S$2,300/sq ft. Raising our selling price to
$2,700/sq ft would add approximately 3-4% to
our forecasts, to be spread over FY10-11. As this
is minimal, we maintain our earnings for now.
We have a more aggressive FY10 revenue OP, FV =
growth projection of 11.8% as we are bullish on RM6.20
the growth prospects for data revenue. Our FY10
and FY11 capex assumptions of RM1.3bn and
RM1.2bn respectively are broadly in line with
management’s expectations.
A revised dividend policy that entails a higher MP, FV =
minimum dividend payout would be positive for RM3.55
share price performance, in our view. TM
currently has a healthy cash pile that, we think,
allows TM to pay out dividends in excess of the
minimum RM700m currently. As for capex, our
gross capex assumptions of RM3.3bn and
RM2.3bn for FY10 and FY11 respectively are
consistent with management’s statement that
HSBB capex would peak this year.
 pass on the higher raw material costs and
weaker US$. Any time lag in passing on the cost
increase, however, would be mildly negative but
not significant.
Hartalega Hartalega plans to allocate RM120m in capex for Neutral. We are keeping our earnings forecast UP, FV =
the next 2 years, part of which will be spent on unchanged for now as we have already assumed RM7.93
plant expansion and technology investment. capex spending of RM120m over the next 2
(BusinessTimes) years.

Changes To Foreign Shareholdings (%)

Stock Feb-10 Mar-10 Chg (%)
B-Toto 16.0 18.0 2.0
Freight Management 21.7 20.0 -1.7
Gamuda 40.0 32.0 -8.0
Genting Malaysia 30.0 31.0 1.0
Genting Plantation 7.0 7.2 0.2
IOI Corp 25.0 25.7 0.7
KLK 16.4 17.0 0.6
MAHB 7.0 6.9 -0.1
Parkson 22.0 26.0 4.0

Important Dates

Company Entitlement details Ex-date Payment date

New entitlements
Success Transformer Renounceable restricted offer of Seremban Engineering shares 12-Apr-10 -
Innoprise Plantations Capital reconstruction 12-Apr-10 -
Innoprise Plantations Renounceable rights issue on 3-for-1 basis 12-Apr-10 -
Digistar Corporation Share dividend on 1-for-20 basis 19-Apr-10
Digistar Corporation Interim dividend of 1 sen less 25% tax 19-Apr-10 4-May-10

Going “ex” on 5 Apr

Mah Sing Group Bonus issue on the basis of 1-for-5 5-Apr-10 -

...For more details, see individual reports attached

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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
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Industry/Sector Ratings

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