PP 7767/09/2010(025354)

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

V is it Note
20 July 2010
MARKET DATELINE

Kuala Lumpur Kepong Share Price

Fair Value
:
:
RM16.40
RM20.70
Value and Growth – Our Preferred Sector Pick 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) 23.2 - 3.1 17.4 10.9 8.1 2.4
2010f 7,646.7 934.7 87.6 24.0 18.7 91.0 3.0 15.0 15.1 8.0 2.7
2011f 9,016.7 1,328.3 124.4 42.1 13.2 103.0 2.7 12.5 19.8 7.2 4.0
2012f 9,285.8 1,402.2 131.4 5.6 12.5 115.0 2.7 11.2 20.9 5.5 4.3
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC/ FBM KLCI Component Stock (2.9% wt)
^ normalised

♦ Five key points from our company visit: (1) Strong FFB growth to
Issued Capital (m shares) 1,065.0
continue for rest of this FY9/10 coming from existing plantations and
Market Cap (RMm) 16,631.7
contribution from Indonesian JV; (2) Continued double-digit growth Daily Trading Vol (m shs) 1.6
expected for FY11; (3) CPO price view unchanged; (4) More details on 52wk Price Range (RM) 11.30-17.26
new Germany plant acquisition; and (5) More land acquisitions coming? Major Shareholders: (%)
Batu Kawan Bhd 46.6
♦ Exciting prospects for New Germany downstream acquisition.
EPF 7.6
KLK’s recent acquisition of the 150,000 tonne Uniqema oleochemical plant
in Emmerich, Germany is a step in the right direction, in our view. KLK
expects to be able to improve profitability of the operations within the FYE Sep FY10 FY11 FY12
first year of operations. This confidence stems from its plans to: (1) EPS chg (%) - 0.9 1.7
Var to Cons (%) (3.8) 20.8 14.2
upgrade the old technology that the plant currently runs on; (2)
implement a hedging policy on its sales and purchases contracts, which is PE Band Chart
non-existent currently; (3) integrate its upstream operations with the
downstream operations in EU to achieve operational synergies; and (4)
restructure the business operations. One of the main advantages of this PER = 25x
PER = 20x
Uniqema plant is the ownership of its own jetty and its ample storage PER = 15x
PER = 10x
tanks and warehousing facilities, as KLK intends to now send all its oil
destined for the European market to Emmerich instead of Rotterdam. This
will not only save KLK storage costs, given that currently, all of its oil is
stored in third party tanks in Rotterdam, but will also give it a competitive
advantage against other downstream players. Relative Performance To FBM KLCI

♦ 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 KL Kepong
oils; (3) revision in global biofuel mandates and trans-fat policies; and (4)
a slower-than-expected global economic recovery, resulting in lower-
than-expected demand for vegetable oils. FBM KLCI

♦ Forecasts. All in, we have revised our forecasts upwards by 0.9-1.7% for
FY11-12, while our FY10 forecast remains unchanged.

♦ Investment case. Post-earnings revision, we raised our SOP-based fair

value for KLK to RM20.70 (from RM20.55) and maintain our Outperform
rating. 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 Hoe Lee Leng
catalysts could come from better-than-expected FFB production growth as (603) 92802184
hoe.lee.leng@rhb.com.my
well as potential return to profitability of the retail division.

Please read important disclosures at the end of this report. Page 1 of 6

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 20 July 2010

♦ Five key points from our company visit: (1) Strong FFB growth to continue for rest of this FY9/10 coming
from existing plantations and contribution from Indonesian JV; (2) Continued double-digit growth expected for
FY11; (3) CPO price view unchanged; (4) More details on new Germany plant acquisition; and (5) More land
acquisitions coming?

♦ Strong FFB growth so far in FY09/10… KLK’s FFB growth in the first eight months of FY09/10 to May 2010 is
a strong 14% yoy, much stronger than its peers (like Sime Darby, IOIC, Genting Plantation and IJMP), whose FFB
production ranged between -4.5% and +9.7% yoy in the same comparative period, due mainly to its favourable
age profile (average 11 years). We note that KLK’s CPO production grew at a stronger rate of 16% YTD due to an
improvement in its OER rate. Going forward, as it heads towards the peak season, KLK expects its FFB production
to continue growing at a strong double-digit rate, potentially completing FY10 at a growth of 15-16% for FFB and
17% for CPO. We note however, that this does not include earnings from KLK’s 60%-owned Indonesian JV, which
has already started contributing in FY10. Recall that this JV involves KLK leasing, operating and managing
20,700ha of land planted with oil palm and rubber, 2 palm oil mills and 3 rubber factories in North Sumatera, for
a 30-year period. Together with the contribution from this JV, FFB production is expected to grow by a stronger
19% in FY10, which is likely to bring CPO production growth to about 20% yoy. In our forecasts, we have
projected FFB production (including JV contribution) to grow by 17% in FY10, with CPO production growth at
17.5%. Although this is slightly lower than management estimates, we are maintaining our production growth
forecasts to be conservative.

Chart 1. KLK’s Monthly FFB Production

360,000

330,000

300,000

270,000

240,000

210,000

180,000

150,000

120,000

90,000

60,000

30,000

2007 2008 2009 2010

Source: Bursa Malaysia, RHBRI

♦ Continued double-digit growth expected for FY11. Going forward into FY11, management expects to be able
to continue recording double-digit growth for its FFB production of 10-12%, while CPO production is expected to
grow at a stronger 11-13% yoy. Based on these projections, it is likely that management is targeting an FFB yield
of improvement of 0.5t/ha for FY10 and 1-1.5t/ha for FY11, while OER improvement is targeted at 0.5%-pt p.a.
for FY10-11. Our estimates are again more conservative for FY11, as we have projected an 8-8.5% yoy growth in
both FFB and CPO production, based on FFB yield improvement of 1t/ha to 24t/ha and flat CPO OER of 21.5%.
We prefer to maintain our projections for now, given the potential uncertainties caused by weather and labour
issues.

♦ CPO price view unchanged. Despite the volatilities seen in CPO prices in the last few weeks, management
remains steadfast in its view that CPO prices would range between RM2,200-2,600/tonne for the rest of the CY.

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 20 July 2010

KLK has, we believe, sold forward its 2HFY10 production earlier at more attractive prices, and we highlight that it
is likely to achieve a CPO price of between RM2,400-2,600/tonne in 2HFY10, which is in line with the spot prices
so far for the same period. We therefore remain comfortable with our CPO price projections of RM2,500/tonne for
FY10, RM2,650/tonne for FY11 and RM2,500 for FY12.

♦ Exciting prospects for new Germany plant acquisition. KLK’s recent acquisition of the 150,000 tonne
Uniqema oleochemical plant in Emmerich, Germany for €60.5m (or RM252.5m) is a step in the right direction, in
our view, as it will enhance its marketing and distribution capability in Europe. To recap, the Uniqema plant is
located along the river Rhine, has ample storage tanks and warehousing facilities, its own jetty and is well served
by road and rail links. It already has a steady customer base and is running at an optimal utilisation rate of 80-
85%. KLK expects to be improve the profitability of the operations within the first year of operations. This
confidence stems from its plans to: (1) upgrade the old technology that the plant currently runs on; (2)
implement a hedging policy on its sales and purchases contracts, which is non-existent currently; (3) integrate its
upstream operations with the downstream operations in EU to achieve operational synergies; and (4) restructure
the business operations. One of the main advantages of this Uniqema plant is the ownership of its own jetty and
its ample storage tanks and warehousing facilities, as KLK intends to now send all its oil destined for the
European market to Emmerich instead of Rotterdam. This will not only save KLK storage costs, given that
currently, all of its oil is stored in third party tanks in Rotterdam, but will also give it a competitive advantage
against other downstream players. In addition, the plant only occupies about 40% of the total landbank (12ha)
included in the acquisition, which means KLK would have plenty of room to expand at a later stage. This will
therefore become KLK’s main European business and distribution base going forward. Based on these
assumptions, we expect KLK to be able to record operational profits of at least €5-8m (RM20-30m) from Uniqema
in FY09/11. After taking into account the interest income foregone for the immediate cash outlay required for the
working capital and the acquisition, we estimate this plant could add approximately 1-2% to KLK’s bottomline in
FY11, although we expect this to grow subsequently, once all the synergies have been realised. We have now
included this acquisition into our forecasts.

♦ Completion of methyl ester sulfonate plant on track, but testing to take some time. KLK’s new methyl
ester sulfonate (MES) and fractionation plants is on track to be completed by end FY09/10. However, KLK expects
the plant to have to undergo 3-6 months of testing before it commences commercial operations, after which it
should be able to ramp up its utilisation to 80-90%, given its customer base. As we had imputed this plant to
begin commercial operations in FY09/11, we are now pushing this back to 2HFY09/11, to incorporate the testing
period. Our capacity utilisation assumptions for the group’s oleochemical division, however, have been raised to
85-87% for FY11-12 (from 80-83% previously), while maintaining our capacity utilisation projection of 85% for
FY10.

♦ Continually looking for M&A opportunities. KLK continues to search for landbank to acquire in Indonesia and
is maintaining its medium term total landbank target of 300,000ha (from 246,000ha currently). Management
noted that pricing of planted land in Indonesia is currently at about US$8,000-10,000/ha (RM25-32,000/ha),
especially in the areas they are interested in. Management also highlighted that it is unlikely to venture into areas
with peat soil like West Kalimantan, Papua New Guinea and Sarawak, nor would they venture into unchartered
territories like Africa or South America at this point in time given the unknown risks there. That being said, we
believe KLK would need to start being more aggressive in its landbank expansion soon, given that based on its
available plantable landbank and its new planting targets of 10,000-15,000ha per year, KLK would only be able to
support this rate of planting for two years, before having to acquire new landbank.

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-than-expected demand for vegetable oils.

Forecasts

♦ Revised upwards slightly. All in, we have revised our forecasts upwards by 0.9-1.7% for FY11-12, while our
FY10 forecast remains unchanged, after: (1) incorporating the new Germany acquisition into our forecasts; (2)
pushing back contributions from KLK’s new MES plant to 2HFY09/11 from 1HFY09/11; and (3), raising capacity
utilisation rates for the manufacturing division to 85-87% (from 80-83% previously) for FY11-12.

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Valuation and Recommendation

♦ Maintain Outperform. Post-earnings revision, we raised our SOP-based fair value for KLK to RM20.70 (from
RM20.55) and maintain our Outperform rating. 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-expected FFB production growth as well as
potential return to profitability of the retail division.

Table 2. Fair Value Calculation

Valuation basis FV (RMm)

Plantation earnings 16x CY11 earnings 20,697.7

Manufacturing earnings 10.5x CY11 earnings 1,513.9

Property earnings 12x CY11 earnings 236.3

Retail earnings Zero asset value less potential asset write-downs (15.1)

Add/(less): Net cash/(debt) (End-2QFY10) (339.33)

SOP (RMm) 22,093.4

SOP/share (RM) 20.70

Shares (m) 1,067.5

Source: RHBRI estimates

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

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

Turnover 6,658.3 7,646.7 9,016.7 9,285.8 FFB Processed (‘000 t) 4,129 4,469 4,688
Turnover growth (%) (15.2) 14.8 17.9 3.0 CPO Production (‘000 t) 888 961 1,008
PKO Production (‘000 t) 202 219 230
Operating Profit 921.6 1,309.9 1,869.6 1,964.3 Average CPO price (RM/t) 2,500 2,650 2,500
Op Profit margin (%) 13.8 17.1 20.7 21.2 Average PKO price (RM/t) 2,700 3,300 3,000

EBITDA 1,210.0 1,555.9 2,123.1 2,241.7

EBITDA margin (%) 18.2 20.3 23.5 24.1

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 1,281.7 1,844.9 1,947.5

Tax (244.8) (324.5) (461.2) (486.9)
PAT 642.6 957.1 1,383.6 1,460.6
Minorities (30.1) (38.9) (55.3) (58.4)
Net Profit 612.5 918.2 1,328.3 1,402.2
Core Net Profit 753.8 934.7 1,328.3 1,402.2
Source: Company data, RHBRI estimates

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 20 July 2010

Chart 2: KLK Technical View Point

♦ The share price of KLK began to slow down its
upward momentum after trading nearer to the
RM17.00 tough resistance barrier in Jan 2010.

♦ Since then, the stock started a sideways crawl,

scaling along the RM17.00 tough resistance level
for the next few months.

♦ In May, the stock accelerated its upward

momentum to RM17.20, before surrendering to the
profit-taking activities.

♦ It was then pulled back to a low of RM15.48, near

our support level of RM15.40, prior to a steady
recovery leg in recent weeks.

♦ It touched a high of RM16.52 in mid-Jul 2010, but

lost its momentum in recent trading.

♦ Sealed with a few negative candles on the chart,

and a cut to below the 10-day SMA of RM16.42, the
short-term outlook of KLK has turned negative.

♦ If it loses the 40-day SMA at RM16.19 soon, it will

trim lower towards the RM15.40 support level
again, in our opinion.

♦ For the medium-term outlook, however, the stock

remains stable within the range from RM15.40 to
RM17.00.

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.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
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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 20 July 2010

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.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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