PP 7767/09/2010(025354)

27 May 2010
Malaysia Corporate Highlights
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
27 May 2010
MARKET DATELINE

Kuala Lumpur Kepong Share Price

Fair Value
:
:
RM15.58
RM18.25
Good Set Of Numbers - Our Favourite For Sector Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (KLK; Code: 2445) Bloomberg: KLK MK

Net Net
FYE Turnover Profit ^ EPS ^ Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Sep (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 6,658.3 753.8 70.6 (33.5) 22.1 - 2.9 16.5 10.9 8.1 2.6
2010f 7,687.6 934.5 87.5 24.0 17.8 90.0 2.9 14.3 15.1 8.1 2.9
2011f 8,910.5 1,315.9 123.3 40.8 12.6 102.0 2.6 11.9 19.7 7.3 4.2
2012f 8,967.4 1,378.3 129.1 4.7 12.1 114.0 2.6 10.6 20.6 5.5 4.5
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC/ FBM KLCI Component Stock (2.9% wt)
^ normalised

♦ In line, good set of numbers. KLK’s 1HFY09/10 core net profit was
RHBRI Vs. Consensus
within expectations, comprising between 44-46% of our and consensus Above
full year FY10 core net profit forecasts. KLK recorded approximately In Line
RM32.5m in EI gains in 1HFY10 from writeback of provision in diminution Below
in value for Yule Catto (2QFY10: RM13.2m). KLK declared a 15 sen
interim single tier dividend. Issued Capital (m shares) 1,065.0
Market Cap(RMm) 16,631.7
♦ Core net profit rose 16% yoy on the back of a 10% rise in turnover in Daily Trading Vol (m shs) 1.6
1HFY10. All divisions except the property division saw improvements in 52wk Price Range (RM) 11.30-17.26
revenue, while the relatively larger rise in net profit was due to improved Major Shareholders: (%)
profit margins for the manufacturing and retail divisions, offset slightly by Batu Kawan Bhd 46.6

lower margins for the plantations and property divisions. Average CPO EPF 7.6

price achieved rose significantly (+18% qoq and 21% yoy) in 2QFY10 to
RM2,509/tonne, which is close to average spot price of RM2,568/tonne for FYE Sep FY10 FY11 FY12
the quarter. However, EBIT margins in the plantations division declined EPS chg (%) - - -
slightly yoy due to higher costs incurred in bringing new fields into Var to Cons (%) (2.7) 20.8 13.3
harvesting in Kalimantan Timur and for rehabilitation work in its Sumatra
PE Band Chart
estates. Both the manufacturing and retailing divisions posted
commendable improvements in margins on the back of stronger selling PER = 25x
pries for the manufacturing division and lower operating expenses in the PER = 20x
PER = 15x
retailing division after the closure of some of its US stores. PER = 10x

♦ Risks. Main risks include: (1) a convincing reversal in crude oil price
trend resulting in reversal of CPO and other vegetable oils price trend; (2)
weather abnormalities resulting in an over or under supply of vegetable
oils; (3) revision in global biofuel mandates and trans-fat policies; and (4)
a slower-than-expected global economic recovery, resulting in lower- Relative Performance To FBM KLCI
than-expected demand for vegetable oils.
♦ Forecasts. Unchanged. We highlight that our forecasts have included the
potential impact of a further restructuring loss for KLK’s retail division of
approximately RM16.5m in FY10 for C&E US. KL Kepong

♦ Investment case. Despite our unchanged forecasts, we revise our SOP-

based fair value for KLK down slightly to RM18.25 (from RM18.40), after FBM KLCI

taking into account the latest net debt figure. We continue to like KLK for
its inexpensive valuations (as it remains the cheapest amongst the big-
cap plantation stocks currently) and for its strong management with a
good track record. Further catalysts could come from better-than- Hoe Lee Leng
expected FFB production growth as well as potential return to profitability (603) 92802184
of the retail division. We maintain our Outperform rating. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 4

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Table 2 : KLK Quarterly Results

FYE Sep QoQ YoY YoY

2Q09 1Q10 2Q10 1HFY09 1HFY10 Comments
(RMm) (%) (%) (%)

Plant. 779.9 866.7 1,060.3 22 36 1,784.7 1,927.0 8 Higher CPO price (+3.5% yoy) of
RM2,319/tonne and higher FFB
production (+16.5 yoy)

Manuf. 602.0 648.4 781.9 21 30 1,254.6 1,430.3 14 Higher selling prices and sales
volume

Retail 106.6 265.7 106.9 (60) 0 364.2 372.5 2 Improvement in same store sales
after closure of non-performing
stores

Property 5.5 10.7 4.4 (59) (19) 23.9 15.2 (37) Lower progress billings on
existing projects and no new
property launches

Others 17.2 30.3 19.9 (34) 16 48.7 50.2 3

Elim. (72.6) (74.0) (72.1) (3) (1) (154.7) (146.1) (6)

Turnover 1,438.6 1,747.7 1,901.3 9 32 3,321.4 3,649.0 10 From all divisions except property

Plant. 189.3 233.1 270.6 16 43 478.9 503.6 5 Lower margins of 26.1% (vs
26.8% in 1HFY09) from higher
costs incurred for harvesting of
new fields in Indonesia

Manuf. 5.8 22.8 37.7 65 553 (0.1) 60.5 (61,870) EBIT margin rose to 8.3% in
1HFY10 (from 2.9% in 1HFY09 -
ex-EI of RM33.5m for write-down
of inventories for China’s
oleochemical operations), due to
higher selling prices

Retail (39.5) 52.5 (19.8) (138) (50) (8.9) 32.7 (466) Improvement in EBIT margin to
8.8% (from -2.5% in 1HFY09),
due to lower operating expenses
after restructuring exercise for
C&E US

Property 2.0 2.5 1.1 (56) (47) 6.4 3.5 (45) In line with revenue

Others 7.5 30.5 10.8 (65) 44 (155.4) 41.3 (127) Includes EI

EBIT 165.1 341.3 300.3 (12) 82 320.7 641.7 100 From all divisions

Margin (%) 11.5 19.5 15.8 9.7 17.6

Int. exp. (17.1) (14.9) (14.1) (5) (17) (35.9) (29.0) (19) Due to lower borowings

Assoc. 10.1 3.0 13.3 341 32 20.3 16.3 (20)

EI (5.5) 19.3 13.2 (32) (340) (189.3) 32.5 n.m. EI gain in 1HFY10 is writeback of
provision for diminution in value
for Yule Catto, while EI loss in
1HFY09 is for: RM142.2m
YuleCatto writedown, RM23.5m
realised forex loss on repayment
of interco loans by Indonesian
subsidiaries and RM23.6m
provision for diminution in value
of other investments

PBT 158.1 329.5 299.5 (9) 89 305.2 628.9 106 Filtered down from EBIT, EI and
lower interest costs

Taxation (41.5) (73.9) (71.2) (4) 72 (119.1) (145.1) 22

Tax rate (%) 26.2 22.4 23.8 39.0 23.1 EI losses and gains not tax-
deductible and not taxable

MI (4.0) (13.8) (12.3) (11) 211 (7.6) (26.1) 243

Net profit 112.7 241.8 215.9 (11) 92 178.5 457.8 156 Filtered down from PBT and lower
effective tax rate

Core net 118.2 222.5 202.7 (9) 72 367.8 425.3 16 Due to higher margins for
profit manufacturing and retail
divisions, offset by lower margins
for plantations and property
divisions

EPS (sen) 10.6 22.7 20.3 (11) 92 16.8 43.0 157

Source: Company, RHBRI estimates

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Table 3. Fair Value Calculation

Valuation basis FV (RMm)

Plantation earnings 18x CY10 earnings 18,305.7

Manufacturing earnings 12.5x CY10 earnings 1,453.2

Property earnings 13.5x CY10 earnings 88.6

Retail earnings Zero asset value less potential asset write-downs (16.5)

Add/(less): Net cash/(debt) (End-2QFY10) (339.3)

SOP (RMm) 19,491.7

SOP/share (RM) 18.26

Shares (m) 1,067.5

Source: RHBRI estimates

Table 4. Earnings Forecasts Table 5. Forecast Assumptions

FYE Sep (RMm) FY09a FY10F FY11F FY12F FYE Sep FY10F FY11F FY12F

Turnover 6,658.3 7,687.6 8,910.5 8,967.4 FFB Processed (‘000 t) 4,129 4,469 4,688
Turnover growth (%) (15.2) 15.5 15.9 0.6 CPO Production (‘000 t) 888 961 1,008
PKO Production (‘000 t) 202 219 230
Operating Profit 921.6 1,311.5 1,855.0 1,933.9 Average CPO price (RM/t) 2,500 2,650 2,500
Op Profit margin (%) 0.1 0.2 0.2 0.2 Average PKO price (RM/t) 2,700 3,300 3,000

EBITDA 1,210.0 1,557.5 2,108.5 2,211.3

EBITDA margin (%) 18.2 20.3 23.7 24.7

Depreciation (205.5) (229.5) (253.4) (277.4)

Net Interest (68.8) (65.8) (59.5) (51.7)
Associates 34.6 37.6 34.7 34.9
EI (82.9) (16.5) 0.0 0.0

Pretax Profit 887.4 1,283.3 1,830.2 1,917.1

Tax (244.8) (324.9) (457.6) (479.3)
PAT 642.6 958.3 1,372.7 1,437.8
Minorities (30.1) (40.3) (56.8) (59.5)
Net Profit 612.5 918.0 1,315.9 1,378.3
Core Net Profit 753.8 934.5 1,315.9 1,378.3
Source: Company data, RHBRI estimates

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
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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.

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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.

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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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