PP 7767/09/2010(025354

)

Malaysia

Corporate Highlights
Sector Upda te

10 March 2010
RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

MARKET DATELINE

Plantation
All For CPO Prices Crossing RM3,000/Tonne

10 March 2010 Recom : Overweight (Maintained)

Table 1 : Plantation Sector Valuations FYE KLK CBIP IOI Corp Sime Darby IJMP^ Genting Plnt Sector Avg ^ FY10-11 valuations refer to those of FY11-12 Sep Dec Jun Jun Mar Dec Price Fair Value (RM/s) 19.50 3.30 6.65 9.85 2.05 5.85 EPS * (sen) FY10 97.8 41.2 27.9 40.7 13.8 40.3 FY11 125.1 49.7 31.5 51.6 16.7 46.8 EPS growth (%) FY10 38.1 42.6 -13.0 8.5 34.8 34.0 5.1 # Formerly known as Asiatic FY11 28.0 20.6 13.0 26.8 21.3 16.0 22.0 17.0 6.7 19.6 21.3 17.8 16.2 19.5 PER (x) FY10 FY11 13.3 5.5 17.3 16.8 14.7 13.9 16.0 P/NTA (x) FY10 3.0 1.4 3.9 2.3 1.7 1.8 2.7 P/CF (x) FY10 13.7 5.4 17.2 15.4 14.1 14.6 GDY (%) FY10 3.0 6.2 2.2 2.5 2.0 1.7 OP OP OP OP UP UP Rec

(RM/s)
16.64 2.75 5.46 8.69 2.46 6.52

*Normalised

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. Projections admittedly more bullish than our expectations. We admit most of the price forecasts given today were slightly more bullish than our expectations. While we believe it is possible for CPO prices to touch or cross the RM3,000/tonne mark, 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. As such, 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 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 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.

Chart 1. CPO vs soyoil and rapeseed oil prices
US$/tonne CPO 1,700 Soy Oil Rapeseed Oil

1,500

1,300

1,100

900

700

500

300

100 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
160 140 Correlation factor of 0.9x in 2007 narrowed to 0.75x in 1H08, and rose again to 0.95x in 2H08. 1400 1200

C ru d e o il p ric e s (U S $ /b a rre l)

120 100 Correlation factor started normalising to 0.7x from Dec-08, but rose again from Sep09 onwards to close to 1x

1000

800

80 60

600

400 40 20 0
Ja Ap n -0 r 0 J u-0 0 O l- 0 0 c J a t- 00 Ap n -0 r 1 J u-0 1 O l- 0 c 1 J a t- 01 Ap n -0 r -0 2 Ju 2 O c l- 0 2 J a t- 02 Ap n -0 r 3 J u-0 3 O c l- 0 3 J a t- 03 Ap n -0 r 4 J u-0 4 O l- 0 4 c J a t- 04 Ap n -0 r 5 J u-0 5 O l- 0 c 5 J a t- 05 Ap n -0 r -0 6 Ju 6 O l- 0 c 6 J a t- 06 Ap n -0 r 7 J u-0 7 O l- 0 c 7 J a t- 07 Ap n -0 r -0 8 Ju 8 O l- 0 c 8 J a t- 08 Ap n -0 r 9 J u-0 9 O c l- 0 9 J a t- 09 n -1 0

200

0

Crude Oil (US$/barrel)

CPO (US$/tonne)

Hoe Lee Leng (603) 92802184 hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report.
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C P O s p o t p ric e s (U S $ /to n n e )

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$7090/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 RM2,8003,200/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 RM2,6002,800/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-thanexpected 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 Company Genting Plantations CBIP Fair Value (RM/share) 5.85 3.30 Valuation Methodology Target 14.5x PER CY10 earnings. Target PER of 8x CY10 for the oil mill engineering division and 12x CY10 for the plantation division.

IJMP IOIC

2.05 6.65

Target 14.5x PER CY10 earnings 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). 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. 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.

KLK

19.50

Sime Darby

9.85

Source: RHBRI

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10 March 2010
Table 3: Impact of every RM100/tonne increase in CPO price Genting Plantations KLK IJMP^ IOI Corp Sime Darby CBIP Source: RHBRI +5-7% +4-6% +5-7% +3-5% +4-6% +2-4%

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

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