PP 7767/09/2010(025354)

30 Jun 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

30 June 2010
Plantation
Recom : Neutral
No Positive Catalysts Ahead, More Cautious Short- (Downgraded)
Term Outlook

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 16.44 20.55 87.4 123.1 23.5 40.8 18.8 13.4 3.0 15.0 2.7 OP
IOI Corp Jun 5.07 6.65 26.8 33.1 -16.3 23.3 18.9 15.3 3.7 16.5 2.4 OP
CBIP Dec 2.63 3.70 41.2 49.7 37.5 20.6 6.4 5.3 1.3 5.0 5.3 OP
First Resources Dec 1.04 1.35 7.9 9.5 +>100 19.9 9.5 7.9 1.7 9.3 2.4 OP
IJMP^ Mar 2.42 2.30 13.5 14.6 20.5 8.2 17.9 16.5 1.7 14.1 2.3 UP
Gent Plantation Dec 6.71 6.50 40.2 45.0 29.3 11.9 16.7 14.9 1.8 14.9 1.6 UP
Sime Darby Jun 8.02 8.15 39.7 48.0 5.9 20.9 20.2 16.7 2.2 14.2 2.7 UP
Sector Avg 0.3 24.2 19.2 15.4
^ FY10-11 valuations refer to those of FY11-12 *Normalised

♦ Downgrading sector, no short-term positive catalysts. We are

Chart 1. CPO vs soyoil and rapeseed
downgrading our recommendation on the plantation sector to Neutral oil prices
(from overweight) on the back of four main factors: (1) onset of the peak US$/tonne
CPO Soy Oil Rapeseed Oil

palm oil production season which will dampen CPO prices in the near term; 1,700

(2) reduced possibility of an El Niño impact, although talk of La Niña has

1,500

now started; (3) potential impact of exchange rate movements and

1,300

1,100

reduction in crude oil price forecasts; and (4) valuations are no longer as 900

attractive after rolling forward to CY11. We believe there are not many 700

positive catalysts which would move CPO prices up in the near term, and 500

therefore expect plantation share prices to remain lacklustre until this 300

changes. 100

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

Risks: (1) a significant change in crude oil price trend; (2) weather
Chart 2. CPO vs crude oil prices
abnormalities; (3) change in emphasis on implementing global biofuel 160 1400

mandates and trans-fat policies; (4) significant changes in trade policies of 140 Correlation factor of 1200
0.9x in 2007

vegetable oil importing or exporting countries; and (5) a sharper-than- 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
1H08, and rose again 1000
Correlation factor to 0.95x in 2H08.

expected global economic slowdown. 100 started normalising to

0.7x from Dec-08, but 800

♦
rose again from Sep-

Forecasts. Despite our now more cautious outlook for the sector for the
80
09 onwards to close
to 1x 600
60

short term, we maintain our CPO price forecasts of an average of 40

400

RM2,500/tonne for 2010, RM2,700 for 2011 and RM2,500 for 2012. We 20 200

believe the medium- to long-term prospects for CPO remain relatively 0 0

O l- 0 0

O l- 0 1

O c l- 0 2

c 3

O l- 0 4

O c l- 0 5

O c l- 0 6

O l- 0 7

O l- 0 8

O c l- 0 9
r 0

r 1

r 2

r 3

r 4

r 5

r 6

r 7

r 8

r 9

r -1 0
J a t- 0 0

J a t- 0 1

J a t- 0 2

J a t- 0 3

J a t- 0 4

J a t- 0 5

J a t- 0 6

J a t- 0 7

J a t- 0 8

J a t- 0 9
J u- 0 0

J u- 0 1

J u- 0 2

J u- 0 3

J u- 0 4

J u- 0 5

J u- 0 6

J u- 0 7

J u- 0 8

J u- 0 9

0
O l- 0

stable, given the still positive stock/usage ratio trends for the global 17
Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-0

Ap n-1
c

c
Ja

Crude Oil (US$/barrel) CPO (US$/tonne)

vegetable oils and fats and the still positive news flow which would support
CPO prices above RM2,000/tonne for the long term.
♦ Investment Case. We are rolling forward our valuation targets to CY11
(from CY10). We believe earnings growth for the planters in the medium
term are no longer as exciting as before, while big premium valuations are
no longer justified. For the Malaysian planters, we note that the premium
valuations over their Singapore and Indonesia peers are back to excessive
levels of 35-45%, versus the traditional 20-30% premium. For the big-cap
plantation stocks like Sime Darby, IOIC and KLK, we now assign a target
CY11 PE of 16x (from 18x CY10) for their plantation divisions. For the mid-
cap plantation stocks like Genting Plantations and IJMP, we now assign a
target PE of 14.5x CY11 (from 16.5x CY10) and for small-cap stocks like
CBIP, we now assign a target PE of 12x CY11 (from 14x CY10). We also
reduce our target PE for First Resources to 10x CY11 (from 11.5x CY11),
which is based on an unchanged 30% discount to our revised target PER Hoe Lee Leng
for the Malaysian mid-cap plantation stocks. No change to our (603) 92802184
Outperform calls on IOIC, KLK, First Resources and CBIP and our hoe.lee.leng@rhb.com.my
Underperform calls on Sime Darby, Genting Plantations and IJMP.

Please read important disclosures at the end of this report.

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♦ Downgrading sector, no short-term positive catalysts. We are downgrading our recommendation on the
plantation sector to NEUTRAL (from overweight) on the back of four main factors: (1) the onset of the peak
palm oil production season which will dampen CPO prices in the short term; (2) the reduced possibility of an El
Niño impact, although talk of La Niña has now started; (3) the potential impact of exchange rate movements and
reduction in crude oil price forecasts; and (4) valuations of plantation stocks which are no longer as attractive
after rolling forward our valuation targets to CY11. We believe there are not many positive catalysts which would
move CPO prices up in the short term, and therefore expect plantation companies’ share prices to remain
lacklustre until this scenario changes.

♦ The onset of the peak production season for palm oil is starting soon, and barring any unforeseen weather
abnormalities, we should see CPO production in both Malaysia and Indonesia picking up pace. In general, this
would then see CPO prices moving in the opposite direction during the period, although this could start reversing
towards the end of the year, once the peak production season is over. In Malaysia, production of CPO in May is
still showing a decline of 0.7% yoy, although on a mom basis, this has started to improve, rising 6.1% from April
2010. Despite this, closing CPO stock levels fell further to 1.56m tonnes in May (from 1.62m tonnes in Apr), thus
resulting in another fall in stock/usage ratios to 8.5% (from 8.8% in Apr and versus the 7-year average of 9.1%).
We expect this to stabilise over the next month or so and then start to increase as we approach the peak
seasonal production period. We believe recovery in production should start taking place more significantly by
July, at the very latest, provided there is no impact from the El Niño weather phenomenon experienced in the
first few months of the year, which means CPO prices could remain lacklustre for the next few months. This can
be seen in the chart below where we plot the inverse relationship between CPO prices and Malaysian CPO
production.

Chart 3 : Inverse Relationship Between Malaysian CPO production and CPO Prices

2,100 4,200
2,000 4,000

1,900 3,800
1,800 3,600

1,700 3,400
1,600 3,200

1,500 3,000
1,400 2,800
C P O P ro d u c t io n ('0 0 0 t o n n e s )

1,300 2,600

C P O p ric e s ( R M /t o n n e )
1,200 2,400

1,100 2,200
1,000 2,000

900 1,800

800 1,600
700 1,400
600 1,200

500 1,000
400 800

300 600
200 400

100 200
- -
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

CPO prices (RM/tonne) CPO production ('000 tonnes)

Source: MPOB, Bloomberg, RHBRI

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 30 Jun 2010
Table 2: Monthly CPO Statistics

('000 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
tonnes)
Opening
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 2,003.2 1,789.2 1,655.7 1,622.6
Imports 82.6 82.4 84.9 109.9 73.3 47.4 153.8 139.4 50.5 35.4 105.3 110.6
Productn 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 1,385.4
Total
supply 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 3,118.6
Exports 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 1,285.5 1,362.1
Domestic
use 211.7 196.2 179.1 182.0 183.6 181.4 144.9 237.3 126.3 159.1 159.3 194.2
Total
offtake 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 1,444.7 1,556.3
End mth
stocks 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 1,622.6 1,562.3
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 1,622.6
Productn
YTD 7,920.7 9,412.9 10,909.0 12,466.7 14,450.8 16,046.3 17,566.4 1,321.3 2,478.1 3,865.4 5,171.6 6,557.0
Mom (%) 3.6 3.2 0.3 4.1 27.4 (19.6) (4.7) (13.1) (12.4) 19.9 (5.8) 6.1
YoY (%) (1.6) (4.4) (6.5) (1.4) 20.1 (3.8) 2.5 (0.7) (2.6) 8.7 1.6 (0.7)
YTD (%) (3.4) (3.6) (4.0) (3.7) (1.0) (1.3) (1.0) (0.7) (1.6) 1.9 1.8 1.3

Exports
YTD 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 5,439.1 6,801.1
Mom (%) 4.0 13.7 (9.4) 0.4 11.8 1.6 (18.5) 19.4 (11.4) 7.9 (8.0) 6.0
YoY (%) 14.2 3.7 (10.2) 2.0 10.7 10.2 (24.2) 8.0 3.0 10.8 7.7 10.7
YTD (%) 9.3 8.4 5.6 5.2 5.8 6.2 3.0 8.0 5.6 7.3 7.4 8.0

Stocks
Mom (%) 2.7 (5.4) 6.3 11.5 25.0 (2.0) 15.7 (10.5) (10.7) (7.5) (2.0) (3.7)
YoY (%) (30.8) (32.6) (23.4) (19.1) (5.6) (14.6) 12.3 9.3 14.3 21.2 25.5 13.9

Source: MPOB, RHBRI

♦ Reduced possibility of El Niño impact, although talk of La Niña has started. The El Niño phenomenon and
its potential impact seems to have faded much faster than expected of late, with prospects of higher rainfall
coming through in 2H2010 in South-East Asia, particularly in Malaysia, Indonesia and Philippines. While this
would be positive for vegetable oil supply in South-East Asia, there can be too much of a good thing, as the
majority of international weather models are now forecasting a continued cooling of the tropical Pacific to below
La Niña thresholds in the coming months, as temperatures below the surface of the equatorial Pacific are now
around 3 to 4 degrees cooler than normal. The Southern Oscillation Index (SOI) remains in positive territory, and
is currently around +8.0 (+10.0 in May). Should this sustain at above +5.0 for a few consecutive months, this is
a typical indicator of La Niña (see Chart 4). Historically, about 35-40% of El Niño events are followed by a La Niña
within the same year. While we conservatively have not imputed the impact of a potential La Niña into our price
forecasts, we note that the faster-than-expected fading of El Niño and quick appearance of La Niña could offset
each other and translate to improved productivity in the South-East Asian region. In Malaysia, Oil World expects
this to translate to a 1.8% yoy growth in CPO production, which is higher than our original estimates of a 0.8%
yoy growth; in Indonesia, this is expected to translate to a 7.2% yoy growth in CPO production (in line with our
expectations).

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Chart 4 : Southern Oscillation Index Chart

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-
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

SOI CPO Price El Nino La Nina

Source: Australian Bureau of Meteorology

♦ The potential impact of exchange rate and crude oil price movements. With the recent decision by the
Chinese government to abandon the RMB6.83 peg to the US$ and to increase the flexibility of the exchange rate,
the Chinese Yuan is expected to appreciate against the US$, making dollar-based commodities cheaper in China
and potentially bolster demand. However, RHBRI’s economics team expects this appreciation to be limited to just
2-3% for the rest of this year, which means the initial euphoria and reaction may reverse at a later stage. We
expect to see continued volatility in the US$ and in commodities prices, particularly for crude oil, which has seen
major movements of +14.4% in the space of the last four weeks.

Chart 5 : 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
/1 9
01 /09

/1 9
/2 9
/1 9
03 /09

/0 9
/2 9
05 /09

/2 9
/0 9
/1 9
07 /09

/1 9
/3 9
08 09

/2 9
/1 9
/2 9
10 /09

/2 9
/0 9
11 /09

/0 9
/1 9
/3 9
01 /09

/2 0
/1 0
02 /10

/1 0
/2 0
/0 0
04 /10

/0 0
/2 0
06 10

/1 0
10
01 /0

02 0
02 /0
03 /0

04 /0
04 /0

05 0
06 /0
06 /0

07 0
07 /0

08 /0
09 /0
09 /0

10 0
11 /0

12 /0
12 /0
12 /0

01 /1
02 /1

03 1
03 /1
04 /1

05 /1
05 /1

06 /1
9/

7/

2/

0/

8/

5/

0/

7/
1
5

2
6
2

6
9
3

1
4
8

3
7
0
4

2
5

9
3
7
1

4
8
1

1
5
8

2
6

3
/0

/2

/2

/0

/0

/1

/0

/1

/1

/2

/2

/0
01

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

Source: Bloomberg, RHBRI

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♦ Exchange rate assumptions revised. We have revised the RM:US$ exchange rates used in our forecasts to
reflect the recent changes in assumptions made by RHBRI’s economics team. We are now projecting the RM:US$
rate to be RM3.25 (from RM3.30) for CY2010, RM3.20 (from RM3.25) in CY2011 and RM3.15 (from RM3.20) in
CY2012. This would have a negative impact on companies with matured plantations in Indonesia (like KLK, Sime
Darby, IOIC and First Resources) and companies with downstream or other operations located overseas (like
Sime Darby, KLK and IOIC), albeit not in a significant manner, given that most of these companies hedge their
overseas revenue exposure.

♦ Theoretical CPO price to range between RM2,178-2,848/tonne based on revised crude oil price
projections. Despite the recent spike in crude oil prices, which we believe is likely to be unsustainable, our in-
house crude oil price forecasts have been cut recently, as RHBRI’s oil & gas analyst believes that the near-term
outlook has turned cautious. In the absence of fundamental catalysts for crude oil prices to move higher, we
expect crude oil prices to remain at current levels of US$75/barrel for the rest of 2010 (from US$80-100) and
pick up to US$75-85 for 2011 (from US$80-100). Longer term projections are unreliable at this stage, although
our expectations remain on the positive side. Based on these revised crude oil price forecasts, and assuming that
the correlation between crude oil and CPO price goes back to the historical average correlation level of 0.7x, we
estimate this would result in CPO prices ranging between RM2,178-2,513/tonne for 2010 and RM2,513-
2,848/tonne for 2011 (see Table 3).

Table 3: CPO Price Sensitivity to Crude Oil Price

RM: US$
exchange
rate 3.10 3.15 3.20 3.25 3.30 3.35 3.40 3.50 3.55 3.60
Crude Oil
Price CPO Price equivalent (RM/tonne)
(US$/barrel)
40 1,298 1,319 1,340 1,361 1,382 1,403 1,424 1,466 1,487 1,508
45 1,461 1,484 1,508 1,531 1,555 1,579 1,602 1,649 1,673 1,696
50 1,623 1,649 1,675 1,702 1,728 1,754 1,780 1,833 1,859 1,885
55 1,785 1,814 1,843 1,872 1,901 1,929 1,958 2,016 2,045 2,073
60 1,948 1,979 2,011 2,042 2,073 2,105 2,136 2,199 2,230 2,262
65 2,110 2,144 2,178 2,212 2,246 2,280 2,314 2,382 2,416 2,450
70 2,272 2,309 2,346 2,382 2,419 2,456 2,492 2,566 2,602 2,639
75 2,435 2,474 2,513 2,552 2,592 2,631 2,670 2,749 2,788 2,827
80 2,597 2,639 2,681 2,723 2,764 2,806 2,848 2,932 2,974 3,016
85 2,759 2,804 2,848 2,893 2,937 2,982 3,026 3,115 3,160 3,204
90 2,922 2,969 3,016 3,063 3,110 3,157 3,204 3,299 3,346 3,393
95 3,084 3,134 3,183 3,233 3,283 3,333 3,382 3,482 3,531 3,581
100 3,246 3,299 3,351 3,403 3,456 3,508 3,560 3,665 3,717 3,770
105 3,408 3,463 3,518 3,573 3,628 3,683 3,738 3,848 3,903 3,958
110 3,571 3,628 3,686 3,744 3,801 3,859 3,916 4,032 4,089 4,147
115 3,733 3,793 3,853 3,914 3,974 4,034 4,094 4,215 4,275 4,335
120 3,895 3,958 4,021 4,084 4,147 4,210 4,272 4,398 4,461 4,524

Source: RHBRI estimates

♦ Despite cautious ST outlook, no change in CPO price assumptions due to stable LT outlook. Despite our
now more cautious outlook for the plantation sector for the short term, we are maintaining our CPO price
forecasts of an average of RM2,500/tonne for 2010, RM2,700 for 2011 and RM2,500 for 2012. We believe the
medium- to long-term prospects for CPO remain relatively stable, given the still positive stock/usage ratio trends
for the global 17 vegetable oils and fats and the still positive news flow which would continue to support CPO
prices above RM2,000/tonne for the long term. Amongst the positive news flow which has come through recently,
includes:

(1) news that the House of Representatives in the US has passed the American Jobs and Closing Tax
Loopholes Act, which includes the biodiesel tax credit extension, retroactive to January 1, 2010, and
expiring December 31, 2010. We believe this will bolster demand for soybean oil and rapeseed oil for biodiesel,
leaving a gap for CPO to fill in the food industry;

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(2) news that Indonesia has implemented some biofuel initiatives in the 2011 state budget, which
include issuing a subsidy for the distribution of biofuels when the biofuel market price is higher than the
market price for oil-based fuel. The subsidy ranges between Rp 2,000 and Rp 2,500 (€0.18-0.22) per litre. This
will ensure that a fall in prices would not cause financial losses to companies already involved in the production of
biofuel in the country under the B5 biodiesel mandate that started in Oct 2008. Under the mandate, consumption
of biofuel is expected to grow by 26.4% yoy in 2011 to 982,000 kilolitres; and

(3) given the recent significant price decline of CPO, the discount between CPO and soyoil has widened and
is back to normalised historical levels of US$98/tonne (from an average of US$88/tonne last month), while
the discount between CPO and rapeseed oil has also widened to US$127/tonne (from US$87/tonne last month)
and is now getting closer towards the historical average of US$200/tonne (see Charts 1 & 6). Given the now
closer-to-historical discount between CPO and soyoil and CPO and rapeseed oil, we do not expect to see much
more “demand rebalancing” in price-sensitive markets like China and India.

Chart 6 : 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

♦ Valuation targets reduced and rolled forward to CY2011. We are rolling forward our valuation targets for
the plantation stocks under our coverage to CY11 (from CY10), given that we are already midway through 2010.
We believe earnings growth for the planters in the medium term are no longer exciting, while the big premium
valuations of plantation companies are no longer justified. For the Malaysian planters, we note that the premium
valuations over their Singaporea and Indonesia peers are back to excessive levels of 35-45%, versus the
traditional 20-30% premium (see Table 7). As such, we believe share prices of the Malaysian planters may
remain stuck at current levels for the next six months. We now use the market PE target for CY2011 of 15x (from
16x CY2010 previously) as our base and assume a premium or discount for the various plantation companies we
cover based on market capitalisation and plantation landbank. For the big-cap plantation stocks like Sime Darby,
IOIC and KLK, we now assign a target CY11 PE of 16x (from 18x CY10) for their plantation divisions. For the mid-
cap plantation stocks like Genting Plantations and IJMP, we now assign a target PE of 14.5x CY11 (from 16.5x
CY10) and for small-cap stocks like CBIP, we now assign a target PE of 12x CY11 (from 14x CY10). We also
reduce our target PE for First Resources to 10x CY11 (from 11.5x CY11), which is based on an unchanged 30%
discount to our revised target PER for the Malaysian mid-cap plantation stocks. The revised target PEs and fair
values are listed below (see Table 4).

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Table 4. Fair Value Changes

Plant Div. Old Plant Div. New
Current Target CY10 Old Revised Target Fair Value
Company FYE Price (RM) PE (x) Fair Value (RM) CY11 PE (x) (RM)
Genting Plant Dec 6.71 16.5 6.65 14.5 6.50
CBIP Dec 2.63 14.0 3.60 12.0 3.70
IJMP Mar 2.42 16.5 2.30 14.5 2.30
IOIC Jun 5.07 18.0 6.80 16.0 6.65
KLK Sep 16.44 18.0 18.25 16.0 20.55
Sime Darby Jun 8.02 18.0 7.95 16.0 8.15
First Resources Dec S$1.04 11.5 S$1.55 10.0 S$1.35
Source: RHBRI

Forecasts

♦ CPO price forecasts maintained. Despite our now more cautious outlook for the plantation sector for the near
term, we are maintaining our CPO price forecasts of an average of RM2,500/tonne for 2010, RM2,700 for 2011
and RM2,500 for 2012. We believe the medium- to long-term prospects for CPO remain relatively stable. We have
however, tweaked our forecasts for the plantation stocks under our coverage slightly, taking into account the
exchange rate assumption changes. Earnings have been revised down by 0.1-1.1% for FY10-12 for most of the
companies covered.

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

♦ Downgraded... We are downgrading our recommendation on the plantation sector to Neutral (from
overweight). We believe there are not many positive catalysts which would move CPO prices up in the near
term, and therefore expect plantation companies’ share prices to remain lacklustre until this scenario changes.

♦ … But still have some stock picks. Despite our Neutral sector recommendation, we continue to have
Outperform recommendations on some stocks within the sector including SGX-listed First Resources (FV =
S$1.35), KLK (FV = RM20.55), IOIC (FV = RM6.65) and CBIP (FV = RM3.70), while we maintain our
Underperform recommendations on Sime Darby (FV = RM8.15), Genting Plantation (FV = RM6.50) and
IJMP (FV = RM2.30).

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Table 5. Valuation Bases

Fair Value
Company (RM/share) Valuation Methodology

Genting 6.50 Target 14.5x PER CY11 earnings.

Plantations
CBIP 3.70 Target PER of 6x CY11 for the oil mill engineering division and 12x CY11 for the plantation division.

IJMP 2.30 Target 14.5x PER CY11 earnings

IOIC 6.65 Target PER of 16x CY11 for the plantation division, 10.5x CY11 for the manufacturing division and 12x
CY11 for the property development and investment property divisions (on fully diluted basis).

KLK 20.55 Target PER of 16x CY11 for the plantation division, 10.5x CY11 for the manufacturing division, 12x
CY11 for the property division and zero value less potential provisions for the retail division.

Sime Darby 8.15 25% holding company and corporate governance risk discount to SOP comprising: target PER of 16x
CY11 for the plantation division and 12x CY11 for the energy & utilities division, heavy equipment,
property, motor and other small divisions.

First S$1.35 Target 10.0x PER CY11 earnings

Resources

Source: RHBRI

Table 6: 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

Table 7. Regional Peer Comparison

Company FYE Price * Currency PER (x) EV/EBITDA (x) P/NTA (x)
FY10f FY11f FY10f FY11f FY10f FY11f
WIL SP Equity Dec 5.91 SGD 15.0 13.5 8.6 7.7 2.1 1.8
IFAR SP Equity Dec 2.17 SGD 14.4 11.7 4.7 4.2 2.0 1.7
GGR SP Equity Dec 0.52 SGD 13.7 9.2 6.4 5.7 0.9 0.9
FR SP Equity Dec 1.09 SGD 11.0 9.9 5.8 5.6 1.7 1.5

Average (Singapore) 16.5 13.5 6.4 5.8 1.7 1.5

AALI IJ Equity Dec 20,550 IDR 13.4 11.8 9.7 8.8 4.2 3.6
LSIP IJ Equity Dec 8,450 IDR 11.8 11.1 8.3 8.2 2.4 2.0
SGRO IJ Equity Dec 2,400 IDR 10.9 9.9 7.2 6.4 2.2 1.9
UNSP IJ Equity Dec 375 IDR 4.7 5.6 3.1 2.8 0.5 0.5

Average (Indonesia) 12.1 10.9 8.4 7.8 2.9 2.5

Average (ex-Malaysia) 12.9 11.0 7.3 6.6 2.2 1.9

Malaysia Ave 19.2 15.4 12.1 10.1 2.6 2.4

Msia's % premium/(discount) over peers 48.5% 39.4% 66.9% 55.9% 18.3% 26.0%

* @ 25 June, in respective currencies

Source: Bloomberg, IBES Consensus & RHBRI

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Chart 7: Sime Technical View Point

♦ Sime halted its uptrend (kicked off since Mar 2009
in Nov last year) after reaching a tough resistance
level at RM9.00.

♦ Thereafter, the stock constantly failed its attempts

to penetrate the tough RM9.00 hurdle.

♦ The stock slowly lost its upward momentum

beginning from Jan 2010, but generally stayed at
between RM8.30 and RM9.00.

♦ In May, the stock fell sharply to below the RM8.00

support level, hitting a low of RM7.47, before
reversing its downswing to above the RM8.00 level
in Jun 2010.

♦ As it struggled to sustain at above RM8.00, its

upside was clearly capped by the falling 40-day
SMA.

♦ The stock registered a huge negative candle

yesterday, cutting from the 40-day SMA to below
the 10-day SMA to RM8.02. This shows a bearish
pattern on the chart.

♦ With most of the indicators showing negative

signals for the near-term trend, investors should be
ready to turn bearish if it loses RM8.00 soon.

♦ Next support is only seen at RM6.70.

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.

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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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