PP 7767/09/2010(025354)

30 September 2010
Corporate Highlights

Malaysia
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Se ctor Up dat e Company No: 233327 -M

MARKET DATELINE 30 September 2010

Plantation
Recom : Neutral
The “Knock-On” Effect (Maintained)

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
KLK Sep 17.02 22.05 124.4 131.4 42.1 5.6 13.7 13.0 2.8 13.0 3.8 OP
IOI Corp Jun 5.55 6.75 33.6 34.9 31.7 3.8 16.5 15.9 3.6 14.7 3.1 OP
CBIP Dec 3.67 4.60 52.7 55.1 21.6 4.4 7.0 6.7 1.4 6.1 4.6 OP
First Resources Dec S$1.17 S$1.40 8.8 10.2 30.1 15.1 9.4 8.2 1.7 9.2 2.7 OP
IJMP^ Mar 2.48 2.56 14.6 13.4 2.0 -8.2 17.0 18.5 1.6 13.3 2.4 MP
Sime Darby Jun 8.53 9.40 48.6 49.9 9.0 2.6 17.6 17.1 2.3 12.6 3.6 MP
Genting
Plantation Dec 7.60 7.40 46.3 44.5 17.5 -4.0 16.4 17.1 1.9 14.7 1.7 UP
Sector Avg 19.7 3.0 16.2 15.7
^ FY10-11 valuations refer to those of FY11-12 *Normalised

♦ Knock-on effect from changes in other vegetable oil dynamics.

Chart 1. CPO vs soyoil and rapeseed
Although not much has changed in terms of the fundamental demand and oil prices
supply factors of CPO in the last few months, there have been changes in US$/tonne
CPO Soy Oil Rapeseed Oil

the dynamics of other vegetable oils, and this has had a knock-on effect on 1,700

CPO prices. Since June 2010, soyoil prices have risen 25%, while rapeseed 1,500

oil prices have risen 20% and CPO prices by 14.4% to current levels.
♦
1,300

La Niña is a major culprit. The La Niña event has strengthened further 1,100

over the past two weeks and the majority of weather models predict that it 900

will persist into at least early 2011. This has had negative effects on 700

planting and harvesting activities of soybean in South America and of

sunflower seed and rapeseed production in Russia and the Ukraine. Global
500

stock/usage ratio for the 17 oils and fats is now expected to fall to 10.6%
300

in 2011 from 11.4% in 2010, quite a significant reduction from our

100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

previous estimate of 11.2% for 2011. Chart 2. CPO vs crude oil prices
♦ CPO to fill the gap. We believe CPO is going to be relied upon more to fill 160 1400

the gap of the other vegetable oils and should there be any disappointment 140 Correlation factor of
0.9x in 2007
1200

in the production of CPO, due to external circumstances, this could likely

narrowed to 0.75x in

C P O s p o t p ri c e s (U S $ / to n n e )
C ru d e o i l p r ic e s (U S $ / b a r re l )

120
1H08, and rose again 1000
Correlation factor started to 0.95x in 2H08.

result in a larger-than-expected spike in CPO prices. As it stands, global

100 normalising to 0.7x from Dec-
08, but rose again from Sep- 800
09 onwards to close to 1x,

CPO stock/usage ratio estimates are expected to be relatively flat in 2011,

80
before falling back to around
0.7x currently. 600

at 15.5%, which means that while CPO prices would be affected by the
60

400

anticipated bullish trend of the other vegetable oils, the increase could be
40

20 200

capped given the as yet unaffected fundamentals of CPO.

♦
0 0

Risks: (1) a significant change in crude oil price trend; (2) weather
J a t- 0 0

O c l- 0 1

J act- 0 2

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0
r 0

r 2

r 3

r 5

r 6

r 7

r 8

r 0
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J -00

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abnormalities; (3) change in emphasis on implementing global biofuel Crude Oil (US$/barrel) CPO (US$/tonne)

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

vegetable oil importing or exporting countries; and (5) a sharper-than-
expected global economic slowdown.
♦ Forecasts and Investment case. Our CPO price forecasts are
unchanged. However, as current CPO prices are slightly higher than
expected, we believe companies with non-calendar financial year-ends
(like IOIC, Sime Darby and IJMP) would be able to take advantage of this
to achieve higher average prices in FY11. As such, we have raised our
FY11 average CPO prices for IOIC, Sime Darby and IJMP by RM50-
100/tonne to reflect this timing advantage. We have also raised our PE
valuation targets by 1-1.5x, taking into account the more positive
fundamentals of the vegetable oil industry and RHBRI’s rolled forward
market PER targets of 16x CY11 (from 15x previously). No change to our
Outperform recommendations on IOIC, KLK, First Resources and CBIP,
Market Perform recommendation on Sime Darby and Underperform
recommendation on Genting Plantations. However, post-target price Hoe Lee Leng
upgrade, we raise our recommendation on IJMP to Market Perform (from (603) 92802184
hoe.lee.leng@rhb.com.my
UP). Maintain NEUTRAL on the sector.

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 30 September 2010

♦ Knock-on effect from fundamental changes in other vegetable oil dynamics. Although not much has
changed in terms of the fundamental demand and supply factors of crude palm oil in the last few months,
there have been potential changes in the dynamics of other substitute vegetable oils, and this has been
having a knock-on effect on CPO prices. We note that since June 2010, soybean oil prices have risen by 25%,
while rapeseed oil prices have risen 20% and CPO prices by 14.4% to current levels.

Chart 3 : CPO vs Soybean Oil and Rapeseed Oil Prices

US$/tonne
CPO Soy Oil Rapeseed Oil

1,700

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

Source: MPOB, Bloomberg, RHBRI

♦ Prolonged dry weather in South America affecting soybean crop prospects. For soybean oil in
particular, there has been prolonged dry weather and extreme heat affecting South America, particularly in
Brazil, due to the impact of La Niña. In general, the weather in South America is normally dry from April to
August, but this year, the La Niña has resulted in prolonged dryness which could result in unfavourable
planting and growing conditions for soybeans. With the first soybean plantings in Brazil normally starting in
mid-September, there is a fear that there could be delays of at least three weeks, which would also result in
pushing back harvesting to late-January, instead of December. Besides the risk of delayed harvests of
soybean, demand for soybean from the biodiesel industry is continuing to rise and in 2011, is projected to
use up 20% of total soybean crops (from an estimated 16% in 2010). As a result of this scenario, global
stock/usage ratio for soybean is expected to fall to 27.6% in 2011 (from 28.7% in 2010).

♦ La Niña is a major culprit. The La Niña event in the Pacific Ocean has strengthened further over the past
two weeks and all weather models predict that the La Niña will last through the southern hemisphere spring,
with the majority indicating the event will persist into at least early 2011.

Chart 4 : Southern Oscillation Index

4000 25

3800
20
3600

3400 La Nina: SOI > +5

15
3200

3000 10

2800
5
2600
Souther Oscillation Index (SOI)

2400
CPO Price (RM/tonne)

0
2200

2000 -5

1800
-10
1600

1400
-15
1200

1000 -20
El Nino: SOI < -5
800
-25
600

400
-30
200

0 -35
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- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul-
00 00 00 00 01 01 01 01 02 02 02 02 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 10

SOI CPO Price El Nino La Nina

Source: Australian Bureau of Meteorology, RHBRI

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 30 September 2010

♦ Sunflower seed and rapeseed production damaged by drought. Besides soybean, oil, there have also
been recent negative developments affecting the supply of other oilseeds like sunflower and rapeseed. In
Russia and Ukraine, crop damage from the drought has resulted in lower expectations for sunflower seed
production, Oil World has recently revised down its global sunflower seed production estimates and now
expects stock/usage ratios for sunflower seed to fall to 5% in 2011 (from the already low 5.3% in 2010 and
8.7% in 2009). Oil World has also revised down its production estimates for rapeseed and canola, predicting
that global production of these two oilseeds is set to decline sharply by 6.3% yoy to a three-year low of
56.8m tonnes in 2011, owing to detrimental weather in the EU and Canada. The global stock/usage ratio for
rapeseed and canola is expected to fall to 9.2% in 2011 (from 12.2% in 2010), a three-year low.

♦ Global stock/usage ratio for 17 oils and fats to fall more significantly in 2011. As a result of the
negative supply developments seen for most of the other oilseeds, we estimate that the global stock/usage
ratio for the 17 oils and fats would fall to 10.6% in 2011 from 11.4% in 2010. We note that this is quite a
significant reduction from our previous estimate of 11.2% for 2011.

Chart 5 : Global Stock/Usage Ratio for 17 Oils and Fats

200,000 17%

180,000 16%

160,000
15%

140,000

tio
14%
s)

era
e

120,000
nn

13%

ag
e(to

s
100,000

k/u
g

12%
sa

c
80,000

to
U

S
11%
60,000
10%
40,000

20,000 9%

0 8%

F
87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20
Disappearance Stock/Usage ratio

Source: Oil World, RHBRI

♦ CPO to fill the gap with not much margin of error. Given the above scenario, we believe CPO is going to
be relied upon more and more to fill the gap of the other vegetable oils, and we estimate CPO’s share of
global oils and fats consumption to rise to as high as 28% in 2011, from 23% in 2005. Oil World projects
global CPO production to rise by a similar percentage as global CPO consumption growth in 2011 of about
6.2% yoy, with the bulk of the production growth expected to come from Indonesia (+8.6% yoy), and less
from Malaysia (+2.8% yoy). As such, should there be any disappointment in the production of CPO, due to
unforeseen weather circumstances and the like, this would likely result in a larger-than-expected spike in
CPO prices. As it stands, global CPO stock/usage ratio estimates are expected to be relatively flat in 2011, at
15.5% (same as 2010), which means that while CPO prices would continue to be affected by the anticipated
bullish trend of the other vegetable oils, the increase could be capped given the as yet unaffected
fundamentals of CPO demand and supply.

Chart 6 : Global Stock/Usage Ratio for Crude Palm Oil

48,000 28%
45,000 26%
42,000
24%
39,000
22%
36,000
20%
roduction('000tonnes)

33,000
sageratio(%)

30,000 18%

27,000 16%
24,000 14%
tock/U

21,000 12%
18,000 10%
S

15,000
P

8%
12,000
6%
9,000
4%
6,000
3,000 2%
- 0%
F

F
87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11
19

19

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19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

Production Stock/Usage Ratio

Source: Oil World, RHBRI

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 30 September 2010

♦ Expect price discounts between CPO and soybean oil and rapeseed oil to remain high for a while.
Given the higher price spikes of soybean oil and rapeseed oil as compared to CPO in the past three months,
we note that the current discount between CPO and soyoil has risen to US$187/tonne (from US$140/tonne
last month) and is now back to being above the average historical levels of US$100/tonne, while the discount
between CPO and rapeseed oil has widened further to US$170/tonne (from US$150/tonne last month), albeit
still below the historical average of US$200/tonne (see Charts 1 & 7). Given the still positive dynamics of
soybean oil and rapeseed oil, versus the relatively unchanged dynamics of CPO, we believe the price
discounts could remain wide in the immediate term, but narrow towards the end of the year, when the peak
production period for CPO ends and CPO prices start to pick up.

Chart 7 : 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
-30 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- Jul-
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 10

CPO v soyoil CPO v rapeseed oil

Source: Bloomberg, RHBRI

Forecasts

♦ CPO price forecasts maintained. We therefore keep our CPO price forecasts at RM2,500/tonne for
CY2010, RM2,700/tonne for CY2011 and RM2,500/tonne for CY2012. We reiterate our view that CPO prices
could weaken in the short term, once the peak production period starts gaining momentum in Malaysia and
Indonesia, but strengthen again towards the year-end, after the peak production period ends. However, as
current CPO prices are slightly higher than initially expected, we believe companies who have non-calendar
financial year-ends (like IOIC, Sime Darby and IJMP) would be able to take advantage of the current prices to
record higher average prices in FY11. As such, we have raised our FY11 average CPO prices for IOIC, Sime
Darby and IJMP by RM50-100/tonne to reflect this timing advantage.

Table 2: Impact of CPO price revision

Old CPO price New CPO price Earnings chg (%)
Company (RM/t) (RM/t) FY2011 FY2012 FY2013
IJMP FY03/11 – 2,550 FY03/11 – 2,650
(FYE Mar) FY03/12 – 2,600 FY03/12 – unchanged +6.0% - -
FY03/13 – 2,500 FY03/13 – unchanged

IOIC FY06/11 – 2,600 FY06/11 – 2,650

(FYE June) FY06/12 – 2,500 FY06/12 – unchanged +1.7% - -
FY06/13 – 2,500 FY06/13 – unchanged

Sime Darby FY06/11 – 2,600 FY06/11 – 2,650

(FYE June) FY06/12 – 2,500 FY06/12 – unchanged +2.8% - -
FY06/13 – 2,500 FY06/13 – unchanged
Source: RHBRI

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 30 September 2010
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) sharper-than-
expected global economic slowdown.

Valuations and Recommendations

♦ Raising valuation targets. We are raising our valuation targets for the plantation stocks under our
coverage by 1-1.5x, taking into account the more positive fundamentals of the vegetable oil industry and
RHBRI’s rolled forward market PER targets of 16x CY11 (from 15x previously). For the big-cap plantation
stocks like Sime Darby, IOIC and KLK, we now assign a target CY11 PE of 17x (from 16x CY11) for their
plantation divisions. For the mid-cap plantation stocks like Genting Plantations and IJMP, we now assign a
target PE of 16x CY11 (from 14.5x CY11) and for small-cap stocks like CBIP, we now assign a target PE of
13x CY11 (from 12x CY11). We also raise our target PE for First Resources to 11x CY11 (from 10.5x CY11),
which is based on an unchanged 30% discount to our revised target PER for the Malaysian mid-cap
plantation stocks.

Table 3. Fair Value Changes

Plant Div. Old Plant Div.
Current Target CY11 Old Revised Target New
Company FYE Price (RM) PE (x) Fair Value (RM) CY11 PE (x) Fair Value (RM)
Genting Plant Dec 7.60 14.5 6.70 16.0 7.40
CBIP Dec 3.67 12.0 4.05 13.0 4.60
IJMP Mar 2.48 14.5 2.30 16.0 2.56
IOIC Jun 5.55 16.0 6.40 17.0 6.75
KLK Sep 17.02 16.0 20.75 17.0 22.05
Sime Darby Jun 8.53 16.0 8.90 17.0 9.40
First Resources Dec S$1.17 10.0 S$1.30 11.0 S$1.40
Source: RHBRI

♦ NEUTRAL sector call unchanged. No change to our Outperform recommendations on IOIC, KLK, First
Resources and CBIP, our Market Perform recommendations on Sime Darby and Underperform
recommendation on Genting Plantations. However, post-target price upgrade, we raise our
recommendation on IJMP to Market Perform (from UP). We maintain our NEUTRAL recommendation on the
plantation sector as a whole.

Table 4. Valuation Bases

Fair Value
Company (RM/share) Valuation Methodology

Genting 7.40 Target 16x PER CY11 earnings.

Plantations
CBIP 4.60 Target PER of 7x CY11 for the oil mill engineering division and 13x CY11 for the plantation division.

IJMP 2.56 Target 16x PER CY11 earnings.

IOIC 6.75 Target PER of 17x CY11 for the plantation division, 11x CY11 for the manufacturing division and 12x
CY11 for the property development and investment property divisions.

KLK 22.05 Target PER of 17x CY11 for the plantation division, 11x CY11 for the manufacturing division, 12x CY11
for the property division and zero value less potential provisions for the retail division.

Sime Darby 9.40 15% discount to SOP comprising: target PER of 17x CY11 for the plantation division and 12x CY11 for
the energy & utilities, heavy equipment, property, motor and other small divisions.

First S$1.40 Target 11x PER CY11 earnings.

Resources

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Source: RHBRI

Table 5: Impact of every RM100/tonne increase in CPO price

Genting Plantations +5-7%

KLK +4-6%
IJMP^ +5-7%
IOI Corp +3-5%
Sime Darby +4-6%
First Resources +8-10% (for every US$50/tonne increase)
CBIP +2-4%

Source: RHBRI

Chart 8: KLK Technical View Point

♦ KLK halted its smooth uptrend after touching a high
near RM16.95 in Jan 2010.

♦ Since then, the stock has encountered a tough

resistance near RM17.00.

♦ In a downswing in May, the stock plunged to a low

of RM15.48 near the key support of RM15.40, but
managed to recover slowly and steadily back to the
key resistance region of RM17.00 in late Jul.

♦ Since early Sep, the stock’s trading pattern has

turned volatile. It surpassed the RM17.00 level in
early Sep, but sunk to a low of RM16.72 in recent
trading.

♦ It managed to end the day at RM17.02 yesterday.

♦ However, sealed with a negative candle, and a

sliding 10-day SMA (RM17.04) towards the 40-day
SMA (RM16.99), we fear that the stock’s near-term
outlook could be jeopardised if the 10-day SMA
cuts below the 40-day SMA and the stock falls to
below RM17.00 again soon.

♦ If that happens, the chart outlook will turn negative

again.

♦ Strong support at the lower end is only seen near

RM15.40, while further resistance is seen at
RM17.80.

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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
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employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

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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 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 FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM 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 FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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