PP 7767/09/2010(025354)

11 May 2010
Corporate Highlights
Malaysia RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
MARKET DATELINE Sector Upda te Company No: 233327 -M

11 May 2010
Plantation
Recom : Overweight
Fall In Production And Exports, But Also In Stock (Maintained)
Levels

Table 1 : Plantation Sector Valuations

Fair EPS * EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
IOI Corp Jun 5.40 6.85 28.7 34.7 -10.5 21.0 18.8 15.6 13.3 3.9 2.2 OP
KLK Sep 16.50 18.40 87.5 123.3 23.7 40.8 18.8 13.4 11.6 3.0 2.7 OP
CBIP Dec 2.53 3.60 41.2 49.7 37.5 20.6 6.1 5.1 5.6 1.2 5.5 OP
Sime Darby Jun 8.56 9.70 39.6 48.3 5.4 22.2 21.6 17.7 12.4 2.3 2.6 OP
Genting
Plantation Dec 6.58 6.65 40.3 46.8 34.0 16.0 16.3 14.1 11.7 1.8 1.7 UP
IJMP^ Mar 2.53 2.35 13.8 15.9 34.8 15.4 18.3 15.9 10.4 1.7 2.0 UP
Sector Avg 2.7 24.4 19.7 15.9
^ FY10-11 valuations refer to those of FY11-12 # Formerly known as Asiatic *Normalised

♦ Fall in production and exports, but also in stock levels. Malaysia’s Chart 1. CPO vs soyoil and rapeseed
CPO production fell back in Apr 10 by 5.8% mom, while exports also fell by oil prices
US$/tonne

8.2% mom. Despite the larger drop in exports versus production, closing
CPO Soy Oil Rapeseed Oil

1,700

CPO stock levels fell to 1.62m tonnes in Apr (from 1.65m tonnes in Mar). 1,500

As a result of the lower CPO stock levels, stock/usage ratio fell further to 1,300

8.8% (from 8.9% in Mar and versus the 7-year average of 9.1%). We 1,100

expect this to moderate further for another 1-2 months, as the weak
900

700

seasonal production period continues and as exports pick up further on an 500

improved economic outlook, although this should start reversing 300

subsequently, as we approach the peak seasonal production period. 100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

♦ Five recent developments. Over the recent month, there have been five Chart 2. CPO vs crude oil prices
main developments including: (1) Argentina soybean oil ban continues; (2) 160 1400

India asking for import tax reimposition; (3) Malaysian labour issues
140 Correlation factor of 1200
0.9x in 2007
narrowed to 0.75x in

C P O s p o t p ric e s (U S $ /to n n e )
C ru d e o il p ric e s (U S $ /b a rre l)

120

escalating?; (4) Crude oil price dropped drastically; and (5) Narrowing of
1H08, and rose again 1000
Correlation factor to 0.95x in 2H08.
100 started normalising to

discounts with soyoil and rapeseed oil.

0.7x from Dec-08, but 800
rose again from Sep-
80
09 onwards to close
to 1x 600
60

♦ Risks include: (1) a significant change in crude oil price trend; (2) 40
400

weather abnormalities; (3) change in emphasis on implementing global 20 200

biofuel mandates and trans-fat policies; (4) significant changes in trade

0 0
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Ja

policies of vegetable oil importing or exporting countries; and (5) a faster Crude Oil (US$/barrel) CPO (US$/tonne)

or slower-than-expected global economic recovery.

♦ Forecasts. No change to our CPO price assumptions and forecasts.

♦ Investment Case. We maintain our Overweight stance on the sector

and continue to apply a target PE of 18x CY10 for the plantation earnings
of the big-cap plantation stocks, 16.5x CY10 for the mid-cap plantation
stocks and 14x CY 10 for the small-cap plantation stocks. We continue to
believe that in the volatile market environment we are expecting for 2010,
the more liquid big-cap stocks will be favoured, especially since the gap
between the big-cap and smaller-cap stocks has narrowed recently. We
maintain our Outperform recommendations on IOIC, KLK, Sime Darby and
CBIP and Underperform on Genting Plantation and IJMP. We continue to
rate KLK as our top pick, due to its inexpensive valuations (as it remains
Hoe Lee Leng
the cheapest amongst the big-cap plantation stocks currently) and for its
(603) 92802184
strong management with a good track record. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report.

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 11 May 2010
Monthly Statistics

♦ Mom fall in production and exports... Malaysia’s CPO production fell back in Apr 10 by 5.8% mom to 1.30m
tonnes, while exports also fell by 8.2% mom to 1.28m tonnes. On a yoy basis, production was slightly higher,
rising 1.6% yoy, but exports rose by a higher 7.5% yoy. Despite the larger drop in exports versus production,
closing CPO stock levels fell to 1.62m tonnes in Apr (from 1.65m tonnes in Mar). Most notably, the mom decline
in exports was to Benin (-7.3%), China (-8.5%), India (-35.3%), Pakistan (-9.1%) and the US (-30.3%); offset
by an increase to Egypt (+38.1%), UAE (+31.9%) and the EU (+66.6%). We believe the main reason for the
decline in exports to India was the switching of demand to soyoil, given the change in price differential as the
discounts between CPO and soyoil narrowed.

♦ … Stock/usage ratio fell back further. As a result of the lower CPO stock levels, stock/usage ratio fell further
to 8.8% (from 8.9% in Mar and versus the 7-year average of 9.1%). We expect this to moderate further for
another 1-2 months, as the weak seasonal production period continues and as exports pick up further on an
improved economic outlook, although this should start reversing subsequently, as we approach the peak seasonal
production period.

Table 2: Monthly CPO Statistics

('000 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10
tonnes)
Opening
stocks 1,292.7 1,371.2 1,408.3 1,332.2 1,416.4 1,579.3 1,974.5 1,934.6 2,239.3 2,003.2 1,789.2 1,655.7

Imports 90.8 82.6 82.4 84.9 109.9 73.3 47.4 153.8 139.4 50.5 35.4 105.3

Productn 1,395.3 1,445.9 1,492.2 1,496.1 1,557.8 1,984.0 1,595.6 1,520.1 1,321.0 1,156.8 1,387.2 1,306.2
Total
supply 2,778.7 2,899.8 2,982.9 2,913.1 3,084.2 3,636.6 3,617.5 3,608.5 3,699.7 3,210.5 3,211.8 3,067.3

Exports 1,230.4 1,279.7 1,454.5 1,317.6 1,322.9 1,478.5 1,501.5 1,224.4 1,461.7 1,294.9 1,396.9 1,282.9
Domestic
use 177.0 211.7 196.2 179.1 182.0 183.6 181.4 144.9 237.3 126.3 159.1 161.9
Total
offtake 1,407.5 1,491.4 1,650.7 1,496.7 1,504.9 1,662.1 1,682.9 1,369.2 1,699.0 1,421.3 1,556.1 1,444.8
End mth
stocks 1,371.2 1,408.3 1,332.2 1,416.4 1,579.3 1,974.5 1,934.6 2,239.3 2,000.7 1,789.2 1,655.7 1,622.5

Productn
YTD 6,474.7 7,920.7 9,412.9 10,909.0 12,466.7 14,450.8 16,046.3 17,566.4 1,321.0 2,478.1 3,865.4 5,171.6

Mom (%) 8.5 3.6 3.2 0.3 4.1 27.4 (19.6) (4.7) (13.1) (12.4) 19.9 (5.8)

YoY (%) (4.3) (1.6) (4.4) (6.5) (1.4) 20.1 (3.8) 2.5 (0.7) (2.6) 8.7 1.6

YTD (%) (3.8) (3.4) (3.6) (4.0) (3.7) (1.0) (1.3) (1.0) (0.7) (1.6) 1.9 1.8

Exports
YTD 6,296.0 7,575.7 9,030.2 10,347.8 11,670.7 13,149.2 14,650.7 15,875.0 1,461.7 2,756.6 4,153.6 5,436.5

Mom (%) 3.1 4.0 13.7 (9.4) 0.4 11.8 1.6 (18.5) 19.4 (11.4) 7.9 (8.2)

YoY (%) 2.5 14.2 3.7 (10.2) 2.0 10.7 10.2 (24.2) 8.0 3.0 10.8 7.5

YTD (%) 8.4 9.3 8.4 5.6 5.2 5.8 6.2 3.0 8.0 5.6 7.3 7.3

Stocks

Mom (%) 6.1 2.7 (5.4) 6.3 11.5 25.0 (2.0) 15.7 (10.7) (10.7) (7.5) (2.0)

YoY (%) (28.3) (30.8) (32.6) (23.4) (19.1) (5.6) (14.6) 12.3 9.2 14.3 21.2 25.5

Source: MPOB, RHBRI

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 11 May 2010
Recent Developments

♦ Five recent developments. Over the recent month, there have been five main developments affecting the palm
oil industry which we would like to highlight, including:

(1) Argentina soybean oil ban continues;

(2) India asking for import tax reimposition;

(3) Malaysian labour issues escalating?;

(4) Crude oil price dropped drastically; and

(5) Narrowing of discounts with soyoil and rapeseed oil.

(1) Argentinean soybean oil ban continues - Positive

⇒ China’s import of Argentine soyoil continues to be disrupted, due to the Chinese government’s decision to ban
Argentine soyoil import permits due to quality requirements involving the level of solvents in the oil, which
according to China’s requirements, must not be more than 100 parts per mln (ppm) (versus Argentinean soyoil
which has > 1000 ppm). Although there are rumours that the Chinese government may relax the ban soon or are
considering waiving the quality certifications requirements so that imports from the US may qualify, this has not
happened yet. We believe it is unlikely that China will resort to importing significant amounts of soyoil from the
US, given the premium of US origin over Argentine soyoil of 5% currently. In addition, Argentinean officials are
trying hard to resolve the spat, and intend to present a proposal to reduce the level of solvents in its soyoil to
350 ppm until 2011 and to 300 ppm thereafter.

⇒ According to the China National Grain and Oils Information Centre (CNGOIC), China's soyoil imports could fall
nearly 40% to 1.5m tonnes in the year ending Aug/Sept 2010, thanks to delays in cargoes from Argentina, but
this should be cushioned by large stocks of vegetable oil in China. We estimate 1.5m tonnes of imported soyoil
would only fulfill 65-70% of the projected import requirements for China in 2010. This shortage may therefore
result in demand potentially being shifted to palm oil and rapeseed oil, if this issue is not resolved in the near
term.

(2) India asking for import tax reimposition - Negative

⇒ The Solvent Extractors Association of India has once again proposed the government to impose a 10% import
duty on CPO (from zero) and raise the duty on refined, bleached and deodorized palm olein to 17.5% (from
7.5%) to control imports and encourage domestic oilseed crushing. This is a protectionist bid to protect India’s
own edible oil producers, given the recent news that the summer monsoon is likely to be normal this year, with
rainfall likely to be 98% of the long-term average. If this is the case, domestic supply of edible oils would be
boosted, and the government may then need to relook at imposing these protectionist policies.

⇒ Despite the good news regarding India’s weather, the fact of the matter is that India’s consumption of the 17 oils
& fats is still expected to outpace domestic supply, with demand growing at 4.1% versus the projected domestic
production growth of 3.5% in 2010. With this undeniable statistic, the Indian government would be hardpressed
to reimpose any import duties when annual food inflation is still hovering at 16-17% in mid-April 2010.

(3) Malaysian labour issues escalating? - Negative

⇒ According to some reports, plantation companies could face gradually declining palm oil extraction rates as well
as a shortage of workers at plantations over the next few months. Properties in the northern states of Peninsular
Malaysia are experiencing a 1% decline in OER to 19% since mid-March due to a biological down cycle as well as
worker shortages, which have resulted in less-intensive efforts to collect fruit. This has led to a higher percentage
of unripe palm fruit bunches with relatively low oil content collected and fruit with higher oil content left
uncollected.

⇒ This if true, is negative for all planters, not just planters in the northern states of Peninsular Malaysia. Most of the
plantation companies we have spoken to so far, have not experienced any significant shortages in labour or
declines in OER yet, although we believe this is more likely to be felt during the peak production season in

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 11 May 2010
3QCY2010. As of now, we note that our production forecasts and CPO price assumptions assume normal weather
and normal labour conditions.

(4) Crude oil price dropped drastically - negative

⇒ Crude oil prices reversed its upward trend, having fallen drastically by 12.8% in one week to US$75/barrel on 7
May, from a high of US$86/barrel on 3 May, on the back of the strengthening US$ against the Euro amidst the
debt crisis in Greece. While we continue to maintain our view that the medium to long term price trend is
expected to be an upward one, given our oil and gas sector team’s crude oil price forecast of US$80-100/barrel
for 2010 and 2011 and our economic team’s recently-adjusted US$ against MYR assumptions of RM3.25/US$ in
CY10 (from RM3.30/US$), RM3.20/US$ in CY11 (from RM3.25/US$) and RM3.15/US$ in CY12 (from
RM3.30/US$), we believe the volatilities caused by the US$ movements against other major currencies will
continue to influence prices in the short term. Assuming that in the medium to long term, the correlation between
crude oil and CPO price goes back to the highly correlated level of 0.9x average, we estimate this would result in
CPO prices ranging between RM2,215-2,769/tonne for 2010 and RM2,769-3,323/tonne for 2011.

Chart 3 : CPO and Crude Oil Price Movement vs RM:US$ Exchange Rate

850 4.00

800 3.90
750
3.80
700
3.70
650
3.60
600
3.50
550

500 3.40
US$/tonne

RM:US$
450 3.30

400 3.20

350 3.10
300
3.00
250
2.90
200
2.80
150
2.70
100

50 2.60

0 2.50
01 /09

01 /09

02 /09

02 /09
03 09

03 /09

04 /09
04 09

05 /09

05 09

06 /09

06 09

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07 09

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10 09

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11 /09

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12 09

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04 /10

05 /10
10
6/

9/

7/

4/

2/

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4/

1/

6/
1

2
/0

/1

/2

/1

/2

/1

/2

/0

/2

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/0
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/3

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/2

/1
/2

/1

/2

/0

/2

/0
01

USD/MYR Crude oil (US$/tonne) CPO (US$/tonne)

Source: Bloomberg, RHBRI

(5) Narrowing of discounts with soyoil and rapeseed oil - neutral

⇒ Given the recent significant price decline of soyoil, the discount between CPO and soyoil narrowed in May, and is
now at a three-year low of US$69/tonne (from an average of US$101/tonne last month and versus historical
average of US$100/tonne), while the discount between CPO and rapeseed oil has also narrowed to US$88/tonne
(from US$108/tonne last month and versus historical average of US$200/tonne) (see Chart 5). The bearish price
movement of soyoil was to be expected, given the recent strengthening of the US$, the large drop in crude oil
prices as well as the completion of soybean harvesting in South America.

⇒ However, given the now smaller-than-historical discount between CPO and soyoil and CPO and rapeseed oil, it is
likely that “demand rebalancing” would occur again in price-sensitive markets like China and India, which could
then result in prices of CPO coming under pressure in the short term. However, we do not expect this demand
rebalancing to necessarily have a significant or long-term impact on demand for CPO, given the projected supply
deficiency of global soyoil exports in the market, and therefore expect the price relationships to return to the
“norm”, at a later stage.

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 11 May 2010
Chart 4 : Discount between CPO and Soyoil and CPO and Rapeseed Oil in US$

690
660
630
600
570
540
510
480
450
420
390
US$/tonne

360
330
300
270
240
210
180
150
120
90
60
30
0
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr-
-30
03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10

CPO v soyoil CPO v rapeseed oil

Source: Bloomberg, RHBRI

Forecasts

♦ CPO price forecasts maintained. Although we have not imputed the risk of any untoward external factors into
our price forecasts, we reiterate our view that fundamentals and price prospects for CPO in CY2010 remain
positive. 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.

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-than-
expected global economic recovery, resulting in a higher- or lower-than-expected growth in demand for
vegetable oils.

Valuations and Recommendations

♦ Maintain Overweight on sector. We maintain our Overweight stance on the sector and continue to apply a
target PE of 18x CY10 for the plantation earnings of the big-cap plantation stocks, 16.5x CY10 for the mid-cap
plantation stocks and 14x CY 10 for the small-cap plantation stocks. We continue to believe that in the volatile
market environment we are expecting for 2010, the more liquid big-cap stocks will be favoured, especially since
the gap between the big-cap and smaller-cap stocks has narrowed recently. At current price levels, we note
that valuations of some of the mid-cap plantation stocks have almost caught up with the big-cap stocks,
making the big-cap stocks seem inexpensive in comparison.

♦ Top pick remains KLK. We maintain our Outperform recommendations on IOIC (FV = RM6.85), KLK (FV =
RM18.40), Sime Darby (FV = RM9.70) and CBIP (FV = RM3.60) and Underperform on Genting Plantation (FV =
RM6.65) and IJMP (FV = RM2.35). We continue to rate KLK as our top pick, due to 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.

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 11 May 2010

Table 3. Valuation Bases

Fair Value
Company (RM/share) Valuation Methodology

Genting 6.65 Target 16.5x PER CY10 earnings.

Plantations
CBIP 3.60 Target PER of 8x CY10 for the oil mill engineering division and 14x CY10 for the plantation division.

IJMP 2.35 Target 16.5x PER CY10 earnings

IOIC 6.85 Target PER of 18x CY10 for the plantation division, 12.5x CY10 for the manufacturing division and 14x
CY10 for the property development and investment property divisions (on fully diluted basis).

KLK 18.40 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.

Sime Darby 9.70 10% discount to SOP comprising: target PER of 18x CY10 for the plantation division, 16x CY10 for the
energy & utilities division and 14x CY10 for the heavy equipment, property, motor and other small
divisions.
Source: RHBRI

Table 4: Impact of every RM100/tonne increase in CPO price

Source: RHBRI
Genting Plantations +5-7%
KLK +4-6%
IJMP^ +5-7%
IOI Corp +3-5%
Sime Darby +4-6%
CBIP +2-4%

Chart 5: CPO Futures Technical View Point

♦ After a pullback from a high of RM2,799 in May
2009, near our key resistance level of RM2,760, the
CPO’s chart had weakened to a low of RM1,964 in
Jul 2009.

♦ However, in an upswing in Oct 2009 to Jan 2010,

the CPO managed to recover to above the RM2,500
level.

♦ But, since it registered two key highs of RM2,726

and RM2,722 in Jan and Mar 2010, it has been
retreating in the recent weeks.

♦ For the past one-and-a-half months, the CPO has

been able to sustain at above the RM2,500 support
level, and given an intra-week “positive harami”
candle registered on Monday, the futures is poised
to sustain the trend into weeks ahead, in our view.

♦ Investors should turn more positive on the outlook

if it breaches the 10-week SMA of RM2,558, and
turn bearish if it breaks RM2,500 and the 40-week
SMA of RM2,438.

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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.

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.

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