PLANTATION SECTOR - Indofood Agri Resources Ltdindofoodagri.listedcompany.com/misc/Plant090112Am.pdfPLANTATION SECTOR Fast start to a new cycle OVERWEIGHT (Upgraded) Rationale for

PLANTATION SECTORFast start to a new cycle

OVERWEIGHT(Upgraded)

Rationale for report : Sector update

12 January 2009

PP12246/4/2009 (021280)

Gan Huey Ling, CFA

[email protected]

+603 2036 2305

Investment Highlights

l CPO price estimates raised; Sector upgraded to Overweight. After a sharp and swift correction in the CPO pricing cyclein 2H08, we are seeing growing signs of a sustained recovery in prices that started from December 2008. We do not thinkthat the recent recovery in CPO price is seasonally-driven ahead of the Chinese New Year festivities.

We are raising our CPO price assumptions to RM2,000/tonne for 2009F (from RM1,800/tonne previously), rising furtherto RM2,300/tonne in 2010F and RM2,500/tonne in 2011F respectively. Accordingly, we are upgrading the plantation sectorto a non-consensus OVERWEIGHT and reinstating the big-cap sector proxies – IOI Corp, Kuala Lumpur Kepong (KLK),Sime Darby and Wilmar International, in our BUY list. We put forth several reasons to underpin our bullish conviction.

l Peaking CPO production and inventory levels. From our recent company visits, we sense that production may soonpeak with the passage of time. Planters have been adjusting their planting and agronomic practices due to the plunge inCPO prices. These proposals such as replanting and reducing the usage of fertiliser, may lower FFB (fresh fruit bunches)yields and production. We understand from a major local fertiliser supplier that demand has been weak as planters areadopting a “wait and see” attitude in anticipation of a lower price for fertiliser before committing to orders.

As it is, we have already seen industry experts revising down production growth estimates to reflect the rapid adjustmentso the supply-side. Production growth in Indonesia has been slashed from 13% to 8%, while Malaysia’s production is nowexpected to remain flat at 18 million tonne for 2009F. Based on our estimates, CPO production in Malaysia is expectedto peak by 3Q2009F before leveling-off. We expect CPO inventory to decline to 1.9 million tonne (November 2008: 2.3million tonne) by year-end due to a combination of a recovery in exports and peaking production.

There is also risk of dry weather threatening soybean production in South America. Brazil’s National Commodities SupplyCorp recently revised its forecast for 2008/09F soybean production by 2% to 57.7 million tonne. Soybean production of 57.7million tonne for 2008/09F is 4% lower than 2007/08F’s soybean crop of 60 million tonne. Like Malaysia, Brazilian soyfarmers have been complaining about the high costs of fertiliser, which is restraining them from planting more soybean.

l CPO defaults overplayed. News of default in CPO shipments appears to have been significantly overplayed. Majorplantation companies under our coverage have indicated that they were not significantly affected by the defaults. Newsreport had placed the amount of CPO defaults at 1.5 million tonne or about 8.6% of Malaysia’s 2008F CPO production.

l Recovery in demand from China and India appears imminent. We expect exports of CPO to China and India to re-accelerate from firming demand trends, and the price of substitutes to rise. Stockpiling of corn and soybean by the provincialgovernments in China should underpin rising soybean prices. To support local farmers, Heilongjiang – a major soybeanregion, needs to buy 4.5 million tonne of corn by April 2009 to boost its reserves.

The Chinese Government’s policy is to stockpile 2 million tonne of soybean, 7.1 million tonne of corn and 5 million tonneof rice in Heilongjiang. Demand from India is also expected to increase due to expectations of an import tax on vegetableoil in the coming months. This is a populist measure by the Indian Government to help farmers ahead of the elections inMay 2009.

l Narrowing price discount between CPO and soybean oil: Based on the last CPO price cycle, we find that the pricediscount movements between CPO and soybean oil are a leading indicator of CPO pricing cycle. Since reaching a peakdiscount of 41% in November 2008, the price discount has narrowed to 38% in December 2008 (10-year average discount:16%). There has been some switching between CPO and soybean oil. Industry players also said that the widening discountin the past year was partly supply-driven as soybean inventory peaked ahead of a peaking in the CPO inventory. Goingforward, the price disparity between the two commodities should decline further on the back of softer CPO output andfirming demand, providing a “kick” to CPO prices.

l Plantation stocks are “under-owned”; a weak US$ may also lift sentiment. IOI’s foreign shareholding stood at 26%as at November 2008, 12-percentage points lower than the high of 38% a year ago. Sime Darby’s foreign shareholdingfell from 21% as at end-March 2008 to 13% as at November 2008. With analysts still clustering at the negative end of the

12 January 2009Plantation Sector

2AmResearch Sdn Bhd

TABLE 1 : VALUATION MATRIX

Source: AmResearch

CHART 1 : CPO PRICE CYCLE (RM/TONNE)

Source: MPOB (monthy prices)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Share price FD EPS (sen/cents) FD PEs (x) Target Prices Upside FY09F GDPS FY09F Div yield(RM/S$) FY09F FY10F FY09F FY10F (RM/S$) (sen)

IOI Corp 4.00 28.7 28.4 13.9 14.1 5.15 28.8% 15.0 3.8%Sime Darby 5.45 38.0 47.7 14.3 11.4 6.70 22.9% 25.0 4.6%KLK 10.00 72.1 87.2 13.9 11.5 11.90 19.0% 40.0 4.0%Kulim 5.05 92.5 105.7 5.5 4.8 6.05 19.8% 8.0 1.6%Sarawak Oil Palms 2.13 17.6 23.2 12.1 9.2 2.65 24.4% 3.0 1.4%TH Plantations 1.41 15.0 17.7 9.4 8.0 1.80 27.7% 8.0 5.7%Asiatic 4.20 40.2 47.9 10.4 8.8 6.00 42.9% 18.0 4.3%IJM Plantations 2.05 24.3 18.7 8.4 11.0 2.80 36.6% 11.0 5.4%Wilmar 2.96 26.7 30.8 11.1 9.6 4.00 35.1% 4.5 1.5%Indofood Agri 0.63 8.2 11.4 7.6 5.5 1.00 60.0% 1.0 1.6%

market, we expect growing evidence of a sustained CPO price recovery to soon trigger a consensus rating upgradeon the plantation sector; rejuvenating the inflow of foreign portfolio funds given its ‘under-owned’ status. A weak US$should also accentuate the return of foreign buying on plantation stocks.

l IOI, KLK and Sime Darby upgraded to BUYs. We are upgrading the big-caps sector proxies – IOI, KLK and SimeDarby to BUY. They are the earliest beneficiaries of a sustained CPO price upcycle and the most liquid. We haveassigned PE multiples of between 12x - 15x to our fair value estimates to reflect the recovery scenario where earningsare rising from the lows.

For IOI, however, earnings risk in FY09F (June) is still high but will improve significantly looking into FY10F. There isa likelihood that IOI would record provisions for diminution in value of its landbank in Singapore and continued forexlosses if the US$ strengthens. FY09F is a kitchen-sinking year for IOI but the group is expected to be on much firmerfooting in FY10F.

We also like Wilmar International as it is a proxy to an economic rebound in China. Wilmar’s other plus points are itseconomies of scale, good track record in reading the financial and commodity markets and global positioning in Europe,China and Russia. Although our top picks are the big-caps, the smaller plantation companies also have their appealdue to their pure exposure. We estimate that for every RM100/tonne change in CPO price, the net profit of the smallercompanies would increase by 5% to 9%. We are also initiating coverage on IJM Plantations and Asiatic Developmentwith a BUY rating, joining TH Plantations and Sarawak Oil Palms.

Plantation Sector

3AmResearch Sdn Bhd

12 January 2009

UPGRADE TO OVERWEIGHT

We are upgrading our recommendation on the plantationsector from UNDERWEIGHT to OVERWEIGHT due to thefactors below.

We have divided our report into two main sections i.e. whathas changed following company visits and our downgradereport six months ago and what will change in the comingquarters.

In line with the upgrade in our sector recommendation, wehave raised our CPO (crude palm oil) price assumptionfrom RM1,800/tonne to RM2,000/tonne for 2009F.

For 2010F, we are now assuming an average CPO price ofRM2,300/tonne versus RM1,800/tonne previously.

What has changed?

1. A broad-based sentiment- driven recovery in commodityprices triggered by recent weakness in the US$ andperception of a further US$ depreciation.

2. Is the recovery in the price of CPO sustainable?Feedback from company visits have revealed thefollowing:

(i) Some cutbacks in fertiliser application;

(ii) Selling on spot;

(iii) Breakdown of correlation with crude oil price;

(iv) Replanting mainly by smallholders;

(v) CPO contract defaults are not a major concernand the trend is reversing due to the recent pricerecovery;

(vi) Low foreign shareholding; and

(vii) Biodiesel policy in Indonesia will take time toimplement.

What will change in the coming quarters?

1. Supply-demand dynamics pointing to further pricerecovery

2. Narrowing of price discount between CPO and soybeanoil

IS THE RECOVERY IN CPO PRICESUSTAINABLE? FEEDBACK FROM COMPANYVISITS

In summary, feedback from company visits revealed thatplantation companies expect CPO prices to recover on theback of slower production growth from a reduction infertiliser application and replanting by the big players andsmallholders.

Also, one of the companies believe that at a certain level,the price of CPO has finally broken away from crude oilprice. CPO prices should stabilise once the problem ofdefaults of shipments by Chinese and Indian importers iscleared up.

q Some cutback in fertiliser application

There is a good mix of companies, which plant to reducefertiliser application because of higher costs and some,which would not be. As a gauge, the usage of fertiliser isabout 8kg to 12kg per tree per year for young oil palm trees.

Based on a Malaysian Palm Oil Board (MPOB) study in2002, reducing fertiliser by 25% would reduce the FFB(fresh fruit bunches) yield of a 12-year old oil palm tree by0.4% in the first year, 2% in the second year and 3% eachin the subsequent two years.

Companies, which plan to reduce fertiliser applicationinclude Asiatic Development (Asiatic) and Kuala LumpurKepong (KLK) while Wilmar International has said that itwould not be.

Sime Darby is still reviewing its fertiliser policy but has saidthat it would not be reducing its fertiliser for the sake ofdoing so. As for IOI Corp (IOI), the group has alreadylocked-in its supply of fertiliser for the coming six months.

Although in November, it was reported that the big sixplantation companies would be holding back fertiliserpurchases for the next six months, we understand fromKLK that the actual amount of the reduction in fertiliserwould have to depend on recommendations from its in-house agronomist.

We believe that some of these companies might havebought more than a sufficient supply of fertiliser in theprevious year, which allows them to hold back purchasesfor the coming six months.

For instance, Asiatic plans to reduce its fertiliser tender by15% in FY09F as it still has an ample supply of fertilisercarried forward from FY07 and FY08. The group did notapply all of its fertiliser fully due to the rainy season in FY07.

Other companies like Wilmar International (Wilmar) hassaid that it would not be reducing its use of fertiliser.Interestingly, Wilmar has a different fertiliser policy fromMalaysian plantation companies.

In Malaysia, plantation companies lock-in their fertilisersupply for six to 12 months whereas Wilmar buys itsfertiliser for a shorter period of three to six months dependingon its view on the price of fertiliser.

Wilmar also has another advantage in that it owns a450,000 tonne/year fertiliser plant, which accounts for lessthan 50% of its annual fertiliser requirements.

We understand from Asiatic that fertiliser costs havedeclined but not by as much as what the plantationcompanies are hoping for. As CPO prices have declined by50%, plantation companies are expecting fertiliser costs tofall by a similar magnitude as well.


4AmResearch Sdn Bhd

Fertiliser companies in Malaysia have pledged to reducefertiliser costs by 15% although according to one of thebigger plantation companies, prices of different types offertiliser have fallen more than that.

We understand from Golden Agri-Resources (Golden Agri)in December 2008 that the price of urea had declined by50% from its peak with phosphate 40% and potash between30% to 40%.

Back in November 2008, Asiatic had said that the cost ofpotash had fallen by 25% from RM3,600/tonne in July 2008to RM2,700/tonne.

Currently, the Malaysian Government is mulling makingimported fertiliser a controlled item i.e. placing a ceiling onits price. The Government is also exploring the option ofbulk buying and selling fertiliser to palm oil and rubberplanters at lower prices.

We believe that it is a matter of time before fertiliser costsstart to decline. But if crude oil and commodity prices startto inch up, the fall in fertiliser costs would be short-lived.

A report by the American Soybean Association on 29December 2008 said that after a six-year increase,wholesale fertiliser prices in US were falling. Retail prices,however have yet to follow suit.

The report quoted the American Farm Bureau Federationas saying that wholesale prices for ammonia in the CornBelt have decreased by 50% while prices for urea havefallen by 60%.

The decline in U.S wholesale fertiliser prices was attributedto lower crop prices and weaker natural gas prices. Naturalgas is the main input used to manufacture ammonia.

q Selling on spot

Plantation companies are expecting CPO price to recoveron a combination of factors. IOI’s view is that CPO pricewould rise to RM2,000/tonne by 1Q2009F due to slowerproduction growth.

KLK thinks that CPO price would rise to RM1,700/tonne toRM1,800/tonne by 2Q2009F underpinned by expandingChinese demand. Due to their positive outlook for thesector, these two companies have stopped selling forwardand are currently selling at spot.

When CPO prices fell in 3Q2008, the bigger plantationcompanies in Malaysia such as IOI and KLK had alreadysold forward some of their FY09F production (see Table 2).

IOI sold forward six months of its FY09F production atprices above RM3,000/tonne while KLK sold forward 40%of its 1QFY09F production forward at about RM2,000/tonne.

KLK believes that its average selling price for FY09Fshould not be lower than RM1,600/tonne because of anexpected recovery in CPO price.

TABLE 2 : HEDGING/FORWARD SALES

Source: Company

IOI Corp Sold forward 6 months of FY09F output atprices above RM3,000/tonne

KLK Sold forward 40% of 1QFY09F output atRM2,000/tonne

Kulim Sold forward 11% of FY09F output atRM2,100/tonne

TH Plant Policy is 30% forward, 30% long-term and40% spot

Asiatic Spot

Sime Darby Spot

CHART 2 : CPO PRICE VS CRUDE OIL

Source: MPOB

0

200

400

600

800

1,000

1,200

Jan-05

Jun-05

Nov-05

Apr-06

Sep

-06

Feb

-07

Jul-0

7

Dec-07

May-08

Oct-08

0

200

400

600

800

1,000

1,200

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

Plantation Sector

5AmResearch Sdn Bhd

12 January 2009

Most of the other companies under our coverage are alsoselling at spot prices. These include medium-size ones likeAsiatic Development and Sarawak Oil Palms and thelarger ones like Sime Darby and Indofood Agri-Resources.

We understand that these companies prefer to followexisting market trends and not take a view on CPO prices.Also, one of the companies i.e. Sime Darby recordedtrading losses of RM120mil in the past, resulting in a moreconservative selling policy currently.

Among the smaller plantation companies, TH Plantationsis the only one with a formal hedging policy. The group’spolicy is to sell 30% of its full year production forward, 30%at long-term prices and the balance 40% at spot prices.

Wilmar also hedges because of the scale of its operations.But the group prefers not to disclose its policy.

Wilmar’s track record in hedging in CPO and foreignexchange seems to have been pretty accurate so far. Thegroup recorded a US$300mil fair value gain on derivativefinancial instruments in its 9MFY08 results.

q Breakdown of correlation with price of crude oil

KLK has said that the price of CPO has stopped moving intandem with crude oil. This appears to be true. Looking atChart 2, the correlation between the two commodities hasbeen declining of late. Although crude oil prices fell to aslow as US$31/barrel on 22 December 2008, CPO pricescontinued to hover between RM1,500/tonne to RM1,800/tonne.

We believe that the direct relationship halted when theprices of crude oil were between US$45/barrel to US$50/barrel. This implies that if the price of crude oil falls belowUS$45/barrel, CPO price would stop declining but if theprice of crude oil rises above US$50/barrel, then CPOwould follow suit.

The weakening relationship started in the last two monthsof 2008. We estimate the daily correlation coefficientbetween crude oil and CPO was 0.1x from November toDecember 2008 compared to October’s 0.9x andSeptember’s 0.5x.

From January 2008 to December 2008, the correlationcoefficient between the two commodities was 0.8x versusJanuary 2008 to October 2008’s 1.0x.

We attribute the declining relationship between the twocommodities to a few reasons.

First, the Chinese government’s proposed purchases ofphysical corn and soybean to support vegetable oil pricesand domestic farmers. When this piece of news first brokeout in late-December 2008, soybean, soybean oil and palmoil surged by the daily limit on the Dalian CommodityExchange.

Second, it appears that there could be a risk of soybeansupply disruptions in Argentina because of dry weather.

Bloomberg quoted the Buenos Aires Cereals Exchange inDecember 2008 as saying that the lack of rain had slowedsoybean planting in Argentina. Planting was projected tocover 18.2 million ha but so far, only about 76% has beenplanted.

A report from the Chicago Board of Trade (CBOT) also saidthat there is potential for lower soybean yields in SouthAmerica as the current financial crisis has affected farmers’credit and cash requirements to purchase and applyfertiliser.

Third, vegetable oil prices are still partly driven by demandfrom the food segment. CBOT quoted an agriculturaleconomist from Purdue University as saying that even ifChina’s growth rate were cut by 2% to 3%, the Chinesewould still eat the same number of calories but they mayshift from animal protein to vegetable protein.

This implies that there would still be demand for soybean.Also, we estimate that more than 30% of palm oil importedinto China, are used as cooking oil.

We reckon that the weakening relationship between crudeoil and CPO brings the cycle back to pre-2006. This waswhen prices of crude oil were averaging at about US$56/barrel and before biodiesel came into picture.

We believe that at current crude oil and CPO prices,biodiesel may not be feasible. Weak crude oil prices wouldexert downward pressure on biodiesel selling prices whilesteady CPO prices would result in rising feedstock costsand eat into margins.

CHART 3 : IOI’S AGE PROFILE TABLE 3 : REPLANTING

Source: Company, AmResearch

Due for replantingDue for replantingDue for replantingDue for replantingDue for replanting

(% of planted areas)(% of planted areas)(% of planted areas)(% of planted areas)(% of planted areas)

IOI Corp 1%

KLK 4%

Sime Darby 3%

Immature

7% Young

10%

Prime

76%

Past Prime

6%

Due

1%

Source: Company


6AmResearch Sdn Bhd

q Replanting - for smallholders; not significant for

larger plantation companies

Although replanting was touted in November 2008 as oneof the initiatives, which would reduce the production ofCPO and inventory in Malaysia and Indonesia, we believethat this would not be a major agenda in most of theplantation companies’ plans for 2009F.

We reckon that most of the 200,000 ha in Malaysia, whichare supposed to be replanted would involve smallholders.It is estimated that smallholders account for 35% to 40% ofthe country’s CPO output.

Generally, replanting involves chopping down trees above25 or 30 years old and planting new trees again. This wouldaffect companies with older oil palm trees. Companies withlarge hectarage of young trees such as Wilmar and GoldenAgri would not be affected.

Most of the companies under our coverage have youngtrees. As at end-June 2008, only 1% of IOI’s trees are duefor replanting while another 6% are past their prime of 15years old (See Chart 3).

KLK plans to replant about 5,000 ha in FY09F (about 4%of planted areas) while Sime Darby’s replanting policy is4% of its planted areas. Currently, however only 3% ofSime’s trees are due for replanting (See Table 3).

Replanting cost in Malaysia would be subsidised by theGovernment via its RM200mil Oil Palm Replanting IncentiveScheme. Based on the reported area to be replanted of200,000 ha, the replanting subsidy would be aboutRM1,000/ha. This is 8% to 10% of the replanting cost ofRM10,000/ha to RM12,000/ha.

The replanting scheme is supposed to reduce CPOproduction by 700,000 tonne (4% of the country’s 2008Foutput of 17.5 million tonne).

In Indonesia, the areas to be replanted are not as sizeableas Malaysia as most of the trees in Indonesia are youngerthan in Malaysia.

It was reported that Indonesia would replant approximately50,000 ha of trees, which would reduce production byabout 100,000 tonne. This is small compared to Indonesia’sprojected output of 19 to 21 million tonne for 2009F.

But if CPO prices rebound, it is likely that the smallholderswould stop replanting and start selling fruits from the oldertrees. Trees older than 25 years old can still be harvestedalthough it would be more difficult because of their height.Also, older trees generally produce less fruits.

q CPO defaults - trend reversing given recent price

recovery

In November 2008, news reports placed the amount ofpalm oil defaults at an alarming 1.5 million tonne or 8.6%of Malaysia’s 2008F CPO production. We understand thatshipments of palm oil, which were defaulted were sold toother companies at lower prices.

According to a CBOT report in October 2008, palm oilprices were being renegotiated several times before beingshipped. Apart from renegotiation of contracts, shipmentswere also deferred.

Based on company visits we found that the major plantationcompanies had not been significantly affected by defaultsin palm oil shipments. The smaller plantation companiesdid not face this problem as they sell their palm oil in crudeform to the refiners.

The main players in the refining industry in Malaysia areWilmar, which commands a capacity of 4.5 million tonne/year and IOI, which has an annual capacity of 3.2 milliontonne/year.

According to IOI, only about 10,000 tonne of its palm oilshipments were defaulted. Most of IOI’s products are soldto its subsidiaries in Johor and Rotterdam and reputablecompanies such as Cargill.

IOI also has back-to-back arrangements with its end-customers, meaning that the risk of defaults by its ownsubsidiaries are minimised.

Similarly for Wilmar. The group was not adversely affectedby the defaults as about 40% of its palm products are soldto joint ventures in China and India. Additionally, Wilmarsells to established companies like Proctor and Gambleand Cargill.

KLK was also not affected by the problem of defaults asmost of the group’s refined palm oil are sold to itsoleochemical subsidiaries in China and Europe. Like IOIand Wilmar, KLK also sells its palm products to largecustomers like Cargill.

According to Sime Darby back in August 2008, it was notaffected by the issue of defaults as less than 3% of itsproducts are sold directly to Chinese and Indian importers.Most of the group’s refined products are sold via tradinghouses.

We believe that the problem of palm oil defaults would easeas CPO prices have been showings signs of stabilityrecently.

The same CBOT report in October 2008 quoted an industryplayer as saying that once the palm oil transactions - whichwere struck at high prices - were adjusted or cancelled andmore sales take place at current prices, then the marketwould recover on fresh demand.

TABLE 4 : FOREIGN SHAREHOLDING

Source: Company

% level Period % level Period

IOI Corp 26% mid-Nov 2008 38% peak as at Sept 2007KLK 13% mid-Dec 2008 23% Feb-2008Sime Darby 13% end-Nov 2008 21% end-Mar 2008Asiatic 9% Nov-2008 12% early-Sept 2008Kulim 21% Oct-2008 29% end-Jun 2008

Plantation Sector

7AmResearch Sdn Bhd

12 January 2009

q Low foreign shareholding

Foreign shareholding of the major plantation companies inMalaysia are currently at their lows, indicating a stronglikelihood that foreign selling has abated and hence, thelimited downside risk.

IOI’s foreign shareholding stood at 26% as at November2008 (See Table 4), 12-percentage points lower than itshigh of 38% a year ago. IOI’s average foreign shareholdingis normally about 35%.

KLK’s foreign shareholding has also taken a tumble. At itspeak in early in 2008, foreign shareholding was 23%. Thishas since shrunk to 13% currently.

Sime Darby’s foreign shareholding fell from 21% in March2008 to 13% as at end-November 2008. In line with thedecline in foreign interest, Sime Darby’s share price hasweakened almost 55% from a year ago.

q Smaller planting programme for 2009F

Most plantation companies have reduced their plantingprogrammes for 2009F because of the current financialcrisis and high fertiliser costs. We understand that plantingcosts have increased from a range of RM10,000/ha -RM12,000/ha to RM15,000/ha currently.

The reduction in the companies’ new plantings would helplower the supply of CPO coming out from Indonesia in themedium-term compared to the scenario based on originalplanting programmes six months ago.

Wilmar has scaled down its planting programme in Indonesiafrom 40,000 ha to about 25,000 ha per year. Indofood Agri-Resources has also brought down its planned new plantingsfrom 35,000 ha to 30,000 ha. Golden Agri plans to plantbetween 10,000 ha to 20,000 ha in FY09F versus FY08F’sestimated 20,000 ha.

Among the Malaysian-based plantation companies, IOIhas also reduced its size of new plantings in Indonesia froma range of 10,000 ha to 15,000 ha to 5,000 ha to 7,000 ha.

But KLK is different from its peers. The group plans tomaintain its planting programme of 10,000 ha per year inFY09F as it had never been as aggressive as the otherplantation companies to begin with.

q Lower capex for 2009F

Partly due to the reduction in planting programmesmentioned above, most plantation companies have scaledback their capex. But Wilmar has said that the currentdownturn provides opportunities and that it is open toacquiring landbank.

Also, we understand from a mill manufacturer that plantationcompanies may switch from commissioning new mills toconverting or refurbishing their existing mills as this wouldbe a cheaper option.

Originally, Wilmar’s FY09F capex was US$1bil. This hasbeen lowered to US$800mil to US$1bil. The reduction incapex is mainly due to smaller areas being opened up forplantings.

Similarly, IOI has reduced its FY09F capex by 15% to arange of RM400mil to RM500mil because of lower newplantings. Its FY09F capex includes the RM600milconstruction of new specialty fats plants in Johor andRotterdam, which would be spread over two years.

As for KLK, capex is estimated at RM500mil for FY09Fcompared to FY08’s RM400mil. This is due to higher costof new plantings.

KLK has not reduced the number of areas it plans tocultivate in Indonesia in FY09F as its planting programmewas never as aggressive as the other plantation companiesto begin with.

Sime Darby has said that it would be reviewing andprioritising its capex. For instance, new property launcheshave been deferred while the number of new showroomsfor the motor division would not be as high as before.

Sime Darby would also be reviewing some of its proposedacquisitions. But if the pricing is right especially for landbankpurchases, then the group would not hesitate to pursue theopportunity. Sime’s original capex is RM1.8bil to RM2.0bilfor FY09F. But, we have forecast RM1.2bil to beconservative.

q Biodiesel policy - will take time

Biodiesel in Indonesia

A CBOT report in October 2008 said that Indonesia wouldbe starting trials of 1% biodiesel use in the transportationsector while the blend for industrial users would be 2.5%.

Indonesia’s biodiesel policy is expected to becomemandatory in 2009F. By 2010F, biodiesel use will increaseto a blend of 2.5%-3% for the transportation sector and 5%for industrial users.

Like Malaysia, however, Indonesia’s biodiesel policy isaccommodative to changes in the price of CPO. Accordingto an Indonesian Government official quoted in the sameCBOT report, the mandatory percentage use of palm oil inbiodiesel may be lowered when CPO price is high and viceversa.

Despite news reports on Indonesia’s biodiesel plans, weunderstand from plantation companies with operations inIndonesia that biodiesel has not taken off in the country.

These industry players believe that it would take time forthe Indonesian Government to execute the biodiesel policy.Biodiesel is supposed to absorb about 2.5 million tonne ofCPO or about 12% of Indonesia’s 2009F projected outputfrom the system.

Among the companies under our coverage, Wilmar is themost prolific in biodiesel. The group plans to increase itsbiodiesel production capacity by an additional 600,000tonne/year to 800,000 tonne/year from its current capacityof 1.05 million tonne/year.

The increase in production capacity would likely be used totap the Indonesian market where the major offtaker wouldmost probably be Pertamina.


8AmResearch Sdn Bhd

Currently, Wilmar’s biodiesel plants are operating at morethan 50% utilisation rate and its biodiesel are sold toEurope and US.

Biodiesel in Malaysia

Due to the recent decline in vegetable oil prices, biodieselhas cropped again as one of the ways to reduce palm oilinventory in Malaysia and Indonesia. We are not excitedover biodiesel as once CPO prices recover, it would bedifficult for biodiesel to be commercially feasible.

Even at current price levels, we believe that margins arethin as the selling price of biodiesel would have fallen in linewith lower crude oil prices. But at the same time, feedstockcost of CPO has stopped declining.

Hence, the current strong growth in biodiesel exports fromMalaysia may not sustain. According to MPOB, biodieselexports from January to November 2008 grew 76% YoY to161,921 tonne.

At US$40/barrel, crude oil is cheaper than CPO. Based ona conversion rate of 7.26 barrels to 1 tonne and anexchange rate of US$1.00:RM3.50, the cost of US$40/barrel translates into RM1,016/tonne compared to currentCPO prices of RM1,900/tonne to RM2,000/tonne.

As for the legislative-driven use of biodiesel, the MalaysianGovernment has said that the country’s biodiesel policywould not be a hard-and-fast policy i.e. if feedstock pricesescalate, the Government may choose to defer the policy.

The Government plans to roll-out B5 biodiesel in thetransportation sector by January 2010F and this is supposedto absorb 500,000 tonne of CPO or 22% of November’spalm oil inventory of 2.3 million tonne, from the system.

Subsidies for biodiesel are expected to be funded from theRM250mil cess collected for MPOB’s price stabilisationfund.

Currently, biodiesel is being used by government bodiessuch as Kuala Lumpur City Hall, Selangor’s Jabatan KerjaRaya and the Royal Malaysian Armed Forces. Theabsorption of CPO from these usage are expected to besmall as Kuala Lumpur City Hall’s requirement is onlyabout 66 tonne of biodiesel per year.

US policy on biofuel following the change inadministration

Currently, the US Department of Agriculture (USDA)forecasts 17% of soybean output in US. would be used inbiodiesel production in 2008/09F. This is almost the sameas 2007/08F.

The US biofuel industry is driven by the non-bindingRenewable Fuel Standard (RFS). The standard stipulatesthe minimum amount of ethanol that must be blended intogasoline every year.

Under the latest RFS, the blending target for 2010 is 13billion gallons of ethanol and 36 billion gallons of ethanol in2022.

The biofuel industry in US is subsidised via tax credits.Legislators in the US. recently voted to continue with theUS$1.00/gallon (US$305/tonne) tax credit for biodieselproduction until end-2009F. But, the tax credit would notapply to biodiesel imported into US to be re-exported toanother country.

So far, President-elect Obama has not announced anychanges to the biofuel policy in US. Based on theComprehensive Energy Plan proposed during his electioncampaign, it would appear that Obama is supportive ofbiofuel.

Under the plan, Obama wants to develop the next generationof sustainable biofuels and infrastructure. The requirementwould be at least 60 billion gallons of advanced biofuels by2030.

Advanced biofuels include cellulosic ethanol, biobutenoland other technologies, which can produce fuel fromsustainable feedstocks.

Biodiesel policy in EU

The European Union (EU) is not as supportive as biofuel asbefore. Lawmakers have voted to indirectly reducevegetable oil-based biofuel targets for 2020 from 10% to6%. This is mainly due to reports showing that the surge infood prices in 2007 and the start of 2008 was attributed tothe use of vegetable oils as feedstock for biofuel.

Although EU lawmakers have kept the biofuel target of10% of transport fuel by 2020, they have voted that at least4% should come from electricity, hydrogen or second-generations biofuels from waste.

The use of biodiesel in Germany, which historicallyconsumes the most in EU is also expected to declinebecause of higher taxes.

Germany started imposing a tax of 9 cents/litre on biodieselin 2007. By 2012, the tax would increase to 45 cents/litre.Due to the protectionist nature of EU, we reckon that themain market for biofuel is likely to be only US.

TABLE 5 : FFB YIELD FORECASTS

Source: Company, AmResearch

FY07 FY08 FY09F FY10F FY11F

IOI Corp 26.7 28.5 28.0 28.0 28.0KLK 22.3 24.0 24.0 24.0 24.0Sime Darby 19.4 21.7 22.0 22.7 23.0Kulim 20.9 23.7 24.1 23.7 23.5Sarawak Oil Palms 20.1 21.0 21.0 21.0 21.0TH Plantations 19.9 22.0 21.0 21.0 21.0Asiatic 22.4 22.4 22.4 22.4 22.4IJM Plantations 22.4 25.1 23.0 23.0 23.0Wilmar 21.9 22.0 22.0 22.0 22.0Indofood Agri 22.5 22.0 22.0 22.0 22.0

Plantation Sector

9AmResearch Sdn Bhd

12 January 2009

WHAT WILL CHANGE IN THE COMINGQUARTERS?

1. Supply-demand dynamics pointing to further pricerecovery

q Palm oil inventory and production adjustment

Our main basis for downgrading the plantation sector sixmonths ago was because of a potential increase in palm oilsupply, which would outstrip demand.

But, since then CPO prices have plunged and the creditcrunch has affected working capital of importers, resultingin defaults of CPO shipments by Chinese and Indianbuyers.

These circumstances coupled with rising production costshave forced Malaysian plantation companies to react inways that would have an impact on the supply imbalancesituation.

These include reducing fertiliser application and plantingprogrammes in Indonesia. Bigger plantation companieslike Sime Darby have also said that they would be embarkingon replanting.

We believe that the reduction in fertiliser application couldbe more prevalent among the smallholders, includingFELDA (Federal Land Development Authority) settlers.

Based on MPOB statistics in 2005, we estimate thatMalaysia’s FELDA planters account for nearly 20% of thecountry’s CPO production of 15 million tonne. As a whole,it is estimated that smallholders account for 35% to 40% ofthe country’s CPO output.

Feedback from plantation companies indicate that it wouldtake between six to 12 months for FFB yields to be affectedby the cut in the use of fertiliser.

Based on a MPOB study in 2002, reducing fertiliser by 25%would reduce the FFB yield of a 12-year old oil palm treeby 0.4% in the first year, 2% in the second year and 3%each in the subsequent two years. Hence, supply or palmproduction could surprise on the downside.

So far, plantation companies in Malaysia have not imputedany impact from the reduction in fertiliser use on theiroutput forecast for 2009F. At the very least, FFB yields areexpected to be flat.

IOI believes that its FFB yield can exceed 28.5 tonne/haalthough we have conservatively forecast 28 tonne /ha forFY09F. This is the same as FY08 (See Table 5). As forKLK, the group reckons that its FFB yield would remain flatat 24 tonne/ha for FY09F (See Table 5).

q Timing of CPO price recovery

Based on past cycles, the CPO pricing cycle turns positiveway before CPO production and inventory decline.

We find that on average, CPO prices react eight months inadvance before MPOB’s monthly statistics showed peaksand subsequent contractions in palm oil production andinventory.

During the 2001/2004 upcycle (See Charts 4 and 5), thefirst inflection point in CPO prices came in October 2001,four months before CPO production touched its cycle-lowand also eight months before palm oil inventory reached itslow.

In the 2006/2008 upcycle (See Charts 4 and 5), CPO pricesswung positive seven months before output declined to itstrough and 11 months prior to palm oil inventory’s reachingits low.

CHART 4 : CPO PRICE (RM/TONNE) VS CPO PRODUCTION (MILLION TONNES)

Source: MPOB

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000Ja

n-01

Jun-01

Nov

-01

Apr-02

Sep

-02

Feb-03

Jul-0

3

Dec

-03

May

-04

Oct-04

Mar-05

Aug

-05

Jan-06

Jun-06

Nov

-06

Apr-07

Sep

-07

Feb-08

Jul-0

8

0.60

0.80

1.00

1.20

1.40

1.60

1.80

CPO price CPO production


10AmResearch Sdn Bhd

q How much should palm oil production and inventory

fall before price of CPO price improves?

We believe that CPO production and inventory would peakin 3Q2009F before softening towards the end of the yearunderpinned by effects from lower fertiliser application andreplanting programmes.

We also think that CPO inventory would most likely inchdown to 1.9 million tonne by the end of the year. Althoughthis is not an exciting figure, it is still lower than the seven-year high of 2.3 million tonne recorded in November 2008.

In 1H2008, CPO production showed good growth afterbeing affected by dry weather and haze in the previousyear. In 2H2008, CPO output started recording slowergrowth after a robust 1H.

Since August 2008, the YoY rate of production growth hasranged from a negative 1.4% to a positive 4.6%. Thehighest YoY increase recorded in 2008 was 25.9% in June.

Based on past cycles, before CPO prices recovered, thedecline in palm oil production was 36% on average. AlthoughCPO production is usually weaker in the first half of thecalendar year, it was different in 2008 because of thecropping pattern.

The palm oil cropping pattern for 2008 was the opposite ofprevious years because of the haze and dry weather, whichaffected FFB yields in 2007. Last year, the country enjoyedstrong harvest in the first six months and slower output inthe second half of the year.

Looking at the 2001/04 and 2006/08 upcycles, both CPOproduction and inventory adjustments were about thesame quantum, 36% on average.

CHART 5 : CPO PRICE (RM/TONNE) VS PALM OIL INVENTORY (MILLION TONNES)

Source: MPOB

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000Ja

n-01

Jun-01

Nov

-01

Apr-02

Sep

-02

Feb

-03

Jul-0

3

Dec

-03

May

-04

Oct-04

Mar-05

Aug

-05

Jan-06

Jun-06

Nov

-06

Apr-07

Sep

-07

Feb

-08

Jul-0

8

0

0.5

1

1.5

2

2.5

CPO price CPO stocks

CHART 6 : CPO INVENTORY (MILLION TONNE) VS SOYBEAN INVENTORY (MILLION TONNE)

Source: MPOB, Oil World

35

40

45

50

55

60

65

70

75

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Soybean ending stock CPO ending stock

Plantation Sector


12 January 2009

In the 2001/04 cycle (See Chart 4), CPO productionpeaked in October 2001 and took about four months todecline 32% to its low. Palm oil inventory reached thecycle-high of 1.34 million tonnes and fell 32% after eightmonths.

During the 2006/2008 cycle, CPO output took five monthsto fall 39% from its peak while palm oil stocks shrank 38%after reaching its cycle-high of 1.8 million tonnes.

What drove the recovery in CPO prices and the decline inproduction in the past two cycles was unfavourable weatherconditions.

The Asian region experienced El Nino in 2001 and in 2006/07, the main producing countries faced dry weather andhaze. Structural change such as biodiesel also contributedto the CPO price upturn in late-2006.

q CPO inventory vis-a-vis soybean inventory

CPO inventory have been trending upwards over the yearsin contrast to soybean ending inventory, which have beendeclining (See Chart 6) after peaking in 2006/07 (based onOil World numbers).

We believe that the increase in CPO inventory partlycontributed to the wide price discount between the twocommodities. Currently, CPO and soybean inventory arestill above their long-term averages.

Based on MPOB statistics (from 2001 - 2008), the long-term average palm oil inventory is roughly 1.4 milliontonne. For soybean ending inventory (based on Oil World’snumbers from 2000/01 to 2007/08), the long-term averageis about 51.8 million tonne.

Going forward, soybean production is expected to increasein 2009F as US farmers switch from planting corn tosoybean and Argentina recover from the strike by farmersin 2008.

In contrast, world palm oil output growth although stillpositive in 2009F, is envisaged to be slower. China’sdemand for soybean is still resilient although the recentdecline in the price disparity between CPO and soybean oilindicates some switching to CPO.

q Export trend - Chinese demand expected to pick up

due to stockpiling by provincial governments

In contrast to the situation six months ago when industryplayers indicated that demand was slowing because ofhigh commodity prices, we now expect demand from Chinato pick-up. This is due to three reasons.

First, the wide price discount between palm oil and soybeanoil. Attractive commodity prices coupled with the festiveperiod in the first half of 2009F are expected to spurdemand for palm oil. In January, China celebrates ChineseNew Year while in May, the country honours Labour Day.

TABLE 6 : USDA PROJECTIONS (AS AT 11 DECEMBER 2008)

Source: USDA

(million pounds) 2006/07 2007/08 2008/09F

Soybean oilBeginning stocks 3,010 3,085 2,483Production 20,489 20,568 19,550Imports 37 65 50Total supply 23,536 23,718 22,083

Domestic 18,562 18,327 18,000- For methyl ester 2,762 2,981 3,100Exports 1,877 2,908 2,050Total use 20,439 21,235 20,050

Ending stocks 3,085 2,483 2,033Average price (cents/pound) 31.02 52.04 31.00-35.00

(million bushels) 2006/07 2007/08 2008/09F

SoybeanPlanted area (mln acres) 75.5 64.7 75.9Harvested area (mln acres) 74.6 64.1 74.4Yield/harvested area (bushels) 42.7 41.7 39.3

Beginning stocks 449 574 205Production 3,188 2,676 2,921Imports 9 10 7Total supply 3,646 3,260 3,133

Crushing 1,808 1,801 1,715Exports 1,116 1,161 1,050Seeds 80 93 90Residual 69 (1) 72Total use 3,073 3,054 2,927

Ending stocks 574 205 205Average price (US$/bushel) 6.43 10.10 8.25-9.75



Second, the Chinese Government’s proposed US$584bilor 4 trillion yuan stimulus package on bridges, housing andtax breaks are envisaged to result in trickle-down effects todomestic consumption. According to Bloomberg, sinceSeptember last year the People’s Bank of China hasgradually reduced its key lending rates to boost spending.

Third, farmers in China have been facing challenging timesbecause of plunging commodity prices. As such, China hasordered state reserves to increase purchases of crops toprotect farming income. This measure is expected tosupport soybean and subsequently palm oil prices.

Last December, a CBOT report quoted Xinhua newsagency as saying that the Chinese government will bebuying 4.5 million tonne of corn for reserves by April 2009Fto stabilise prices.

A Bloomberg report in December said Heilongjiangprovince, a major producing region, had been authorisedto buy one million tonne of soybean and 4.5 million tonneof corn.

According to the China National Grain and Oils InformationCenter, the government’s intended purchases of corn willamount to 30 million tonnes in total.

The same CBOT report said that purchases of vegetableoils is part of the Chinese government’s policy to stockpile7.1 million tonne of corn, 5 million tonne of rice and 2 milliontonne of soybean in Heilongjiang.

Heilongjiang province is estimated to account for nearlyhalf of China’s soybean production in 2008.

China is the world’s largest importer of soybean andbiggest consumer of palm oil from Malaysia. Although palmoil exports from Malaysia to China were flat YoY fromJanuary to November 2008, China still accounted for asizeable 25% of Malaysia’s exports.

q How does the current cycle differ from previous

cycles?

The current cycle started in late-2006 and ended in mid-2008. From July 2006, the price of CPO surged 165% to amonthly average high of RM3,681/tonne in April 2008before plunging to a low of RM1,517/tonne in November.

The first difference between the current cycle and pastcycles is the speed of the retracement in the price of CPO.While it took almost 21 months for CPO prices to reach itspeak in April 2008, it only took seven months for prices tofall to its trough of RM1,517/tonne (based on monthlyaverage prices). In the past, it took between 11 months in2001/2004 to as long as 30 months in 1998/2001.

We attribute the speed of the rise and correction in the priceof CPO to the role of speculators.

As an indication, statistics provided by Bursa Malaysiarevealed that domestic and foreign retailers accounted for67% of the trading volume in the CPO futures market inNovember 2008 versus 22% in January 2006.

The second difference is CPO’s correlation with crude oil.Due to the use of soybean and palm oil as feedstock forbiodiesel, vegetable oils have been viewed as an alternativeto renewable fuels.

In the past, there were no impetus for biodiesel as EuropeanUnion and the U.S did not have legislative mandates forbiofuel. Hence, as crude oil price rallied towards US$147/barrel in 2008, the price of CPO also followed in tandemand vice versa.

The third difference is the broadening of supply-demanddynamics. Since 2002, China has overtaken India as thelargest importer of palm oil while Indonesia replacedMalaysia as the biggest producer from 2007 onwards.

CHART 7 : CPO PRICE (RM/TONNE) VS DISCOUNT B/W CPO AND SOYBEAN OIL (%)

Source: MPOB

-45.0%

-35.0%

-25.0%

-15.0%

-5.0%

5.0%

15.0%

Jan-9

6

Jun-9

6

Nov-9

6

Apr-97

Sep-9

7

Feb-9

8

Jul-98

Dec-9

8

May-99

Oct-9

9

Mar-00

Aug-0

0

Jan-0

1

Jun-0

1

Nov-0

1

Apr-02

Sep-0

2

Feb-0

3

Jul-03

Dec-0

3

May-04

Oct-0

4

Mar-05

Aug-0

5

Jan-0

6

Jun-0

6

Nov-0

6

Apr-07

Sep-0

7

Feb-0

8

Jul-08

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Price discount b/w CPO and CSO CPO price

Plantation Sector


12 January 2009

Also, in spite of environmental protests against palm oil inUS., the country’s imports of Malaysian palm oil haveshown an impressive growth of 201% since 2003.

The emergence of China makes demand for palm oil moreresilient compared to India, which has a tendency tochange the import tax system for vegetable oils every nowand then.

The increase in US’ role as the fourth largest importer ofMalaysian palm oil is also a positive as US importers arebetter paymasters. So far, there has been no reports ofdefaults by US customers.

Indonesia’s growth in the plantation sector over the pastfew years was driven by aggressive expansion of plantings.This was partly prompted by the Government’s movessuch as opening up of areas for cultivation in Kalimantan.

Based on our coverage of companies with operations inIndonesia, we forecast Wilmar International’s CPOproduction to increase 9% to 1.7 million tonne in FY09Fcompared to a 13% increase estimated for FY08F.

Indofood Agri’s FY09F output growth of 5% is not a goodgauge due to the high base effect in FY08F’s, whichincorporated the full-year impact of the acquisition of PPLondon Sumatra.

q Oil World projects softer palm oil output growth in

2009F

Latest projections by Oil World indicate that palm oil outputin Malaysia is expected to stagnate between 17.5 to 18million tonne in 2009F while production in Indonesia isestimated to increase 8% to 20.8 million tonne. This islower than the 13% growth projection by Oil World sixmonths ago.

According to the December 2008 Oil World report,Indonesian producers expect slower productivity in thecoming months from the above-average performanceregistered in 2008.

Globally, palm oil production are envisaged to inch up by1.9 million tonne in 2009F versus 2008’s increase of 4.9million tonne. Driving production growth in Indonesia aremainly increased planted areas.

We understand from an industry player that companiesowned by the Indonesian Government account for 50%-60% of the country’s output. Smallholders account for 20%while the private sector account between 20%-30% of thecountry’s CPO production.

q USDA projects flat soybean inventory in 2008/09F,

barring unpredictable weather conditions

Soybean production in US is envisaged to increase 9% to2,921 million bushels in 2008/09F on the back of 17% risein planted areas resulting from farmers switching from cornto soybean (See Table 6).

In spite of the positive production growth, the USDA hasforecast the country’s soybean ending stocks to remain flatat 205 million bushels in 2008/09F (See Table 6).

Underpinning the stagnant number is a lower carry-overinventory from 2007/08, which is envisaged to compensatefor higher production. Biodiesel is expected to account for17% of soybean oil usage in US.

For Brazil, USDA has projected soybean production tosoften 3% to 59 million tonne in 2008/09F. However,recently Brazil’s National Commodities Supply Corp revisedits estimate for the country’s 2008/09F soybean productiondown by 2% from 58.8 million tonne to 57.7 million tonne.Soybean production forecast of 57.7 million tonne for2008/09F is 4% below 2007/08F’s estimated output of 60million tonne.

The downward revision in soybean output estimates is dueto unfavourable weather. According to a CBOT report earlythis month, the south of Brazil has been facing a prolongeddry spell since November 2008.

CHART 8 : FFB YIELD CYCLE (TONNES/HA)

Source: MPOB

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

23.019

75

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007



Also, Brazilian soy farmers have been complaining thathigh costs of fertiliser and low soybean prices have beeneating into their margins, which is restraining them fromplanting more soybean or using fertiliser.

In Argentina, after being affected by strikes over the exporttax in 2008, farmers are expected to resume plantings thisyear. USDA has forecast soybean output to expand 9% to50.5 million tonne in 2008/09F.

Globally, ending stocks of soybean are envisaged to inchup 2% to 54.2 million tonne in 2008/09F while that ofsoybean oil are estimated to shrink from 2.7 million tonneto 2.5 million tonne.

World production of vegetable oils are forecast to rise 5%to 133.9 million tonne in 2008/09F not only because ofhigher soybean output but also because of increasedsunflower and rapeseed production from Canada andEurope. Ending inventory of vegetable oils are expected toexpand 9% to 10.6 million tonne in 2008/09F.

A main factor that could throw all these forecasts out isunfavourable weather. The weather in US. was volatile lastyear, resulting in fears that hurricanes and snowstormswould threaten soybean production. In the preceding year,it was the drought in US., which affected soybean yields.

q Updates on weather - potentially dry weather in

Argentina

Currently, there are concerns that the drier-than-normalweather in Brazil and Argentina would affect soybeanyields.

The USDA reported in December 2008 that conditions hadbeen exceptionally dry in parts of southern Brazil since theearly part of November while dry and unseasonably warmweather had affected a large section of central andnortheastern Argentina that included key summer grainand oilseed areas.

Brazil and Argentina are major soybean producingcountries, accounting for an estimated 47% of worldsoybean production in 2008/09F.

As for palm oil, the Australian and US. climate or meteorologyagencies have not predicted El Nino or dry weatherconditions yet.

Instead, both agencies are forecasting neutral or La Ninaconditions through early-2009F. This implies that so far,weather conditions for palm oil are expected to be favourablein 2009F.

2. Narrowing of price discount between CPO andsoybean oil

Feedback from company visits suggests that the widediscount between CPO and soybean oil is supply-driven. Inthe past year, CPO production in Indonesia and Malaysiahad been good, leading to record-high inventory levels.

Defaults by Chinese and Indian importers after CPO pricesstarted falling exacerbated the situation resulting inwarehouses being filled up with palm oil stocks.

In contrast, US soybean ending stocks are forecast toremain flat at 205 million bushels in 2008/09F versus theprevious year.

Supply growth of soybean, especially in the US. is less thanpalm oil as soybean output are partly absorbed by biofuelproduction.

CPO production is also higher than soybean as it is aperennial crop i.e. palm oil can be harvested the whole yearcompared to soybean, which are annual crops. Dependingon prices, farmers in U.S can also switch easily fromplanting corn to soybean and vice versa.

Industry players reckon that CPO prices would have todecline to attractive levels before demand for CPO starts tokick-in and narrow the disparity between the twocommodities.

Since November 2008’s high of 41% (See Chart 7), theprice discount between CPO and soybean oil has declinedto about 38%, indicating that there has been switchingbetween the two commodities.

To recap, the average price discount between CPO andsoybean oil is 20% for the past five years. The only periodwhen CPO price was higher than soybean oil was fromFebruary 1998 to May 1999 when severe El Nino affectedpalm oil production in Malaysia.

Looking at past cycles, we find that lately, prices of CPOhave been led by the discount between CPO and soybeanoil.

This means that the price discount between the twocommodities reached its peaks and lows before CPOprices reacted (See Chart 7). In contrast, before 2006 themovement between the discount in pricing and spot CPOprices was almost in sync.

In the past two years, the price disparity between the twocommodities touched a low of 2% in May 2007 before CPOprice achieved its monthly high of RM3,681/tonne 11months later.

But, since then CPO prices and the price disparity betweenCPO and soybean oil have been falling almost at the samepace.

During the 2006/08 upcycle, the price discount betweenCPO and soybean oil reached three lows in October 2004,August 2005 and June 2006 before CPO prices startedrising in late-2006.

OTHER ISSUES

q Biological stress in 2009F?

Based on feedback from company visits, we do not believethat there would be biological stress in 2009F. It has to benoted that feedback given by plantation companies doesnot take into consideration any potential softening in FFByields resulting from lower application of fertiliser.

Plantation Sector


12 January 2009

Asiatic said it does not expect any biological stress and thatthe weak CPO production in 3QFY08 was only due todelays in cropping pattern.

The group expects CPO output to recover in the comingfew quarters. Also, KLK said that it should be able tomaintain its FFB yield of 24 tonne/ha for FY09F.

In spite of the group’s sterling FFB yield of 28.5 tonne/hain FY08, IOI believes that its FFB yields can still expand.Our assumption for FY09F is a more conservative 28tonnes/ha.

Oil palm trees face biological stress once every three years(See Chart 8). This usually sets in after a few years ofbumper harvest. It was reported recently that after a goodharvest in 2008, the trees in Malaysia would face biologicalstress in 2009F.

We find this strange as CPO production in Malaysia is notexpected to decline, instead it will stagnate at 17.5 milliontonne or rise marginally to 18 million tonne in 2009F.

Indonesia is not expected to face any biological stress in2009F as increased CPO output is envisaged to beunderpinned by new mature areas and contribution fromyoung trees. The age profile of oil palm trees in Indonesiais younger than that of Malaysia.

Looking at the 2006/08 price cycle in Chart 4, the expansionin Malaysia’s CPO production started in 2004 and peakedtwo years later in 2006. Thereafter, CPO productiondeclined. We believe that the fall in CPO output in 2007 isnot entirely because of biological stress. Instead, it waslargely due to the haze and dry weather in late-2006.

q RSPO - the next trend in planting

We believe that more plantation companies, especially thelarger ones would seek RSPO (Roundtable for SustainablePalm Oil) certification in the future.

This is to accommodate European customers, who areincreasingly environmentally-conscious. For instance,Unilever has said that it would only buy certified palm oilproducts by 2015.

TABLE 7 : EARNINGS AND DIVIDEND REVISION

Source: AmResearch*refers to FY3/10F

Previous Previous New New Chg Previous Newassumption FY09F EPS assumption FY09F EPS FY09F DPS FY09F DPS(RM/tonne) (sen/cents) (RM/tonne) (sen/cents) (sen/cents) (sen/cents)

IOI Corp 2,500 25.5 2,600 28.7 13% 12.0 15.0Sime Darby 1,800 29.0 2,000 38.0 31% 20.0 25.0KLK 1,800 52.2 2,000 72.1 38% 35.0 40.0Kulim 1,800 69.1 2,000 92.5 34% 6.0 8.0Sarawak Oil Palms 1,800 11.7 2,000 17.6 50% 1.5 3.0TH Plantations 1,800 8.4 2,000 15.0 79% 6.0 8.0Asiatic na na 2,000 40.2 na na 18.0IJM Plantations na na 2,000 18.7* na na 12.0*Wilmar 1,800 25.8 2,000 26.7 4% 3.3 4.5Indofood Agri 1,800 4.6 2,000 8.2 78% 0.5 1.0

The first RSPO-certified shipment of palm oil reachedEurope in November 2008. About 500 tonne of certifiedpalm oil were produced by United Plantations Bhd forUnilever and J Sainsbury.

Sime Darby has also shipped 4,000 tonne of certified palmoil to its own subsidiary, Unimills BV in Rotterdam inDecember 2008.

Despite the RSPO certification, there were still protests byenvironmental groups such as Greenpeace. Theorganisation seeks stricter criteria for certification as thecurrent system fails to account for issues such asdeforestation and land conflicts.

In response, RSPO has said that the assessment processeswere rigorous enough and it would examine Greenpeace’sclaims.

Other companies seeking to comply with RSPO guidelinesare Wilmar, Kulim and IOI. We understand from an industryplayer that the cost of certification is about US$10/tonne(RM35/tonne).

We also gather that the premium for certified palm oilproducts is small and may disappear as more plantationcompanies certify their palm oil products.

RSPO said in November 2008 that it expects certified palmoil to reach 1.5 million tonne in 2009F. This is still smallcompared to Malaysia’s and Indonesia’s combined CPOproduction of 36 million tonne estimated for 2008F.

Currently, the certification is carried out by independentbodies such as SGS Malaysia and Control Union. RSPOguidelines include non-use of fire on peat soil and properwater management system.

Some of the guidelines such as non-usage of fire to openup land for palm oil are already being practised by plantationcompanies in Malaysia and Indonesia.



FY09F EARNINGS REVISION

Based on changes to our 2009F CPO price assumption,pure plantation companies such as Sarawak Oil Palms andTH Plantations would benefit the most as a RM100/tonnechange in CPO price would translate into a 5% to 7%increase in FY09F net profit assuming other things remainconstant.

Bigger companies such as IOI and KLK would experiencesmaller improvements in net profit of 2% to 5%.

Nevertheless due to the scale of their plantation operationsand low-cost structure, we believe that the bigger playerswould be the earliest beneficiaries of a recovery in CPOprice.

Among the companies under our coverage, Kulim and THPlantations are expected to record the highest growth inCPO production of more than 50% each.

This is mainly because of acquisitions of brownfieldlandbank. The other plantation companies are anticipatedto record CPO output growth of 2% to 5% for FY09F.

In making revisions to our earnings forecast, we have notonly adjusted for higher CPO price but also for improvedoperating margin. Hence, our earnings adjustments maybe higher than the sensitivity analysis for the plantationcompanies mentioned above.

In line with the upward revision in earnings, we have alsoraised our dividend assumptions for FY09F. The companieswith the highest dividend yields are Sime Darby and THPlantations (See Table 1) due to their 50% dividend payoutpolicies.

STOCK RECOMMENDATIONS

As we are no longer as pessimistic as we were six monthsago, we are not applying trough PE multiple of 10x to arriveat the target prices of the plantation companies under ourcoverage anymore. Instead, we are applying normalisedPE valuation of 12x-15x on CY09F plantation earnings.

We have upgraded the recommendations on our plantationstock universe from SELLs and HOLD to BUYS. Despiteour BUY recommendation on IOI as it is one of the mostliquid plantation stocks on the KLCI, we would like tocaution on the group’s earnings risk.

IOI’s FY09F earnings are likely to be dragged by a slew ofexceptional losses arising from potential diminution invalue of landbank in Singapore and forex losses. Takinginto account these non-cash items, IOI’s earnings wouldmost likely only recover in FY10F.

Our top picks in the sector are big-caps like IOI, Sime Darbyand KLK as they are the most liquid and the earliestbeneficiaries of an uptick in CPO prices.

Due to IOI’s and KLK’s downstream operations in Europe,US and China, they also provide exposure to a globaleconomic recovery.

We like Wilmar as it is a proxy to an economic rebound inChina. Wilmar’s other plus points are its economies ofscale, good track record in reading the financial andcommodity markets and growing global positioning inEurope, Africa and Russia.

KEY RISK FACTORS

1. Demand from China does not come through

This would exacerbate the palm oil inventory problem inMalaysia and Indonesia. Warehouses would be filled up,exerting downward pressure on CPO prices. This wouldresult in defaults in shipments of CPO by Chinese andIndian importers again.

But we believe that since CPO prices are off their highs ofRM3,000/tonne to RM4,000/tonne, demand from Chinashould start to recover. Recall that in early-2008, Malaysianpalm oil exports to China declined when CPO prices wereescalating above RM4,000/tonne.

Support should also come from large soybean crushers inChina, which are currently facing higher domestic soybeanprices compared to international prices. This is mainly dueto the Chinese government buying corn and soybean toboost local vegetable oil prices to help farmers.

2. Better-than-expected CPO and soybean production

Smallholders may decide not to replant if CPO pricesrecover. This is because even though oil palm trees morethan 25 years old have lower FFB yields, they can stillproduce fruits.

But if crude oil prices improve, then fertiliser prices areunlikely to continue coming down. Hence, there is stronglikelihood that smallholders and some of the biggerplantation players would continue with their proposedcutback in fertiliser application. This would in turn weakenFFB yields and CPO production.

3. A reversal in biofuel policy in the US.

This would have a detrimental effect on the soybean andcorn industries as approximately 17% of soybean are usedas feedstock in biodiesel.

But we see minimal risk of a reversal in biofuel policy as thenew US President has indicated his support for renewablefuels.

In addition, previous attempts by a few states in US to seeka waiver from complying with the ethanol target were shotdown by the country’s Environmental Protection Agency.

Plantation Sector


12 January 2009

4. Demand from U.S falters

Despite protests from non-governmental organisationsthat palm oil is not environmentally friendly, demand forMalaysian palm oil from US is still robust. From January toNovember 2008, exports to US surged 27% YoY whileChinese imports stagnated.

There is a risk that there would be less industrial demandfor palm oil-based products since the US is currently inrecession.

But looking at SGS’ statistics for palm oil exports forDecember 2008, there are no signs of a slowdown yet.Palm oil exports to US climbed 80% MoM in December2008.

IOI CORPORATION

Gan Huey Ling, CFA

[email protected]

603 2036 2305


lllll We are upgrading IOI Corporation (IOI) from HOLD to BUYwith higher RNAV-based fair value of RM5.15/share to re-flect the following:

1. Increased CPO (crude palm oil) price assumption ofRM2,300/tonne for FY10F and RM2,500/tonne for FY11F.For FY09F, we have assumed an average CPO price ofRM2,600/tonne compared to RM2,500/tonne originally.This takes into account IOI’s forward sales at pricesabove RM3,000/tonne for six months of FY09F outputand a higher average CPO price of RM2,000/tonne forFY09F versus RM1,800/tonne.

2. Higher PE assumption of 15x based on CY09F earn-ings to arrive at our fair value of RM5.15/share insteadof 10x. We believe that the trough phase for CPO pricesis over and hence, we are applying normalised PE valu-ations.

3. Expansion in plantation EBIT margin following the up-grade in CPO price assumption.

lllll Although there are risks to IOI’s FY09F earnings arisingfrom provision for diminution in value of landbank inSingapore and forex losses (if the US$ strengthens andthe group closes its forward contracts), we believe thatIOI is a FY10F earnings story and a liquidity play in a CPOprice upcycle. Additionally, if the US$ weakens further,there is a possibility that IOI’s forex losses would be ne-gated.

lllll IOI remains one of the more efficient plantation compa-nies in the country, with plantation EBIT margin exceed-ing 60% and FFB (fresh fruit bunches) yields ranging be-tween 27 tonne/ha to 28 tonne/ha. Coupled with econo-mies of scale, the group is one of the earliest beneficia-ries of a recovery in CPO prices.

lllll IOI was not adversely affected by the recent defaults inpalm oil shipments by Chinese and Indian importers. Thisis because the group’s products are sold mainly to itssubsidiaries and reputable companies such as Cargill. IOI’ssubsidiaries in turn, have back-to-back arrangements withtheir customers, which minimises the risk of defaults.

lllll IOI has already locked-in its fertiliser supply for the com-ing six months. The group’s fertiliser costs is aboutRM1,600/ha to RM1,700/ha (FY08: RM1,200/ha), account-ing for 30% of production costs. IOI’s operating cost isabout RM1,100/tonne.

lllll IOI’s foreign shareholding is 26% presently compared tothe peak foreign shareholding level of 38% a year ago. Wereckon that the low level of foreign shareholding is an in-dication that foreign selling has abated and there is mini-mal downside risk.

Price RM4.00Fair Value RM5.15

52-week High/Low RM2.08-RM8.60

Key Changes

Target price Ý

EPS Ý

YE to Jun FY08 FY09F FY10F FY11F

Revenue (RMmil) 14,665.4 15,332.2 16,098.6 16,995.9Net Profit (RMmil) 2,231.6 1,834.3 1,809.8 2,033.4EPS (sen) 37.0 30.4 30.0 33.8FD EPS (sen) 35.0 28.7 28.4 31.9EPS growth (%) 56.4 (17.8) (1.3) 12.4Consensus net profit (RMmil) 1,595.1 1,593.6 1,729.6DPS (sen) 17.0 15.0 17.0 21.0PE (x) 10.8 13.1 13.3 11.9FD PE (x) 11.4 13.9 14.1 12.6EV/EBITDA (x) 8.8 9.5 9.3 8.3Div Yield (%) 4.3 3.8 4.3 5.3ROE (%) 27.7 20.4 17.9 18.1Net Gearing (%) 36.6 29.3 20.8 13.5

Stock and Financial Data

Shares Outstanding (million) 6,150.6

Market Cap (RMmil) 24,602.4

Book value (RM/share) 1.37P/BV (x) 2.9

ROE (%) 26.6

Net Gearing (%) 36.6

Major Shareholders Tan Sri Lee Shin Cheng

(41.6%)EPF (10.8%)

Free Float (%) 58.4

Avg Daily Value (RMmil) 76.7

Price performance 3mth 6mth 12mth

Absolute (%) +6.4 -39.9 -52.1

Relative (%) +12.2 -25.4 -22.3

Company Report

PP12247/6/2009/(021181)

PLANTATION

(IOI MK, IOIB.KL)

Rationale for report : Company update

Looking towards FY10F

BUY(Upgraded)

12 January 2009

12 January 2009IOI Corporation


TABLE 1 : FINANCIAL DATA

Source: Company, AmResearch estimates

Income Statement (RMmil, YE 30 Jun) 2007 2008 2009F 2010F 2011F

Revenue 8,952.7 14,665.4 15,332.2 16,098.6 16,995.9EBITDA 1,985.0 3,105.5 3,009.8 2,986.1 3,303.5Depreciation (199.8) (222.5) (226.7) (247.4) (268.1)Operating income (EBIT) 1,785.2 2,882.9 2,783.1 2,738.7 3,035.4Other income & associates 37.3 46.1 64.1 62.7 66.7Net interest (104.5) (122.9) (193.0) (198.0) (182.7)Exceptional items 273.1 289.1 - - -Pretax profit 1,991.1 3,095.2 2,654.2 2,603.4 2,919.3Taxation (340.1) (683.0) (637.0) (598.8) (671.5)Minorities/pref dividends (168.9) (180.6) (182.9) (194.8) (214.5)Net profit 1,482.1 2,231.6 1,834.3 1,809.8 2,033.4Core net profit 1,209.0 1,942.6 1,834.3 1,809.8 2,033.4

Balance Sheet (RMmil, YE 30 Jun) 2007 2008 2009F 2010F 2011F

Fixed assets 4,467.8 4,519.3 4,792.6 5,045.2 5,278.1Intangible assets 589.7 569.8 569.8 569.8 569.8Other long-term assets 2,817.6 4,672.4 4,869.3 5,075.8 5,298.2Total non-current assets 7,875.0 9,761.4 10,231.7 10,690.8 11,146.1Cash & equivalent 2,735.2 2,895.9 2,924.7 3,308.4 3,633.4Stock 1,332.8 2,447.9 2,940.4 3,087.4 3,259.5Trade debtors 936.0 1,468.8 840.1 882.1 931.3Other current assets 801.8 687.1 1,344.1 1,431.4 1,530.5Total current assets 5,805.8 7,499.8 8,049.3 8,709.4 9,354.7Trade creditors 393.0 622.6 630.1 661.6 698.5Short-term borrowings 249.7 1,097.0 1,109.6 1,131.8 1,154.4Other current liabilities 503.7 690.3 591.2 620.7 654.1Total current liabilities 1,146.4 2,409.9 2,330.9 2,414.0 2,507.0Long-term borrowings 3,381.7 4,867.2 4,623.8 4,392.6 4,063.2Other long-term liabilities 556.6 627.7 603.3 603.3 603.3Total long-term liabilities 3,938.2 5,494.8 5,227.1 4,995.9 4,666.5Shareholders’ funds 7,739.3 8,391.4 9,575.0 10,647.4 11,769.9Minority interests 857.0 965.1 1,148.0 1,342.9 1,557.4BV/share (RM) 1.24 1.37 1.56 1.73 1.92

Cash Flow (RMmil, YE 30 Jun) 2007 2008 2009F 2010F 2011F

Pretax profit 1,991.1 3,095.2 2,654.2 2,603.4 2,919.3Depreciation 199.8 222.5 226.7 247.4 268.1Net change in working capital (912.5) (1,796.0) (1,249.4) (814.1) (921.4)Others 39.1 (150.2) 0.0 0.0 0.0Cash flow from operations 1,317.5 1,371.6 1,631.4 2,036.7 2,266.0Capital expenditure (182.3) (230.8) (500.0) (500.0) (500.0)Net investments & sale of fixed assets 67.3 26.4 (2.6) (2.9) (3.2)Others (876.5) (1,632.7) (1,802.1) (203.7) (220.2)Cash flow from investing (991.5) (1,837.1) (2,304.7) (706.5) (723.4)Debt raised/(repaid) 1,816.8 3,406.2 (221.6) (209.0) (306.8)Equity raised/(repaid) (20.8) (1,025.4) 0.0 0.0 0.0Dividends paid (529.5) (388.8) (650.6) (737.4) (910.9)Others (91.4) (1,429.9) 0.0 0.0 0.0Cash flow from financing 1,175.1 562.1 (872.2) (946.4) (1,217.7)Net cash flow 1,501.1 96.6 (1,545.5) 383.7 325.0Net cash/(debt) b/f 1,220.4 2,721.0 2,879.7 1,325.0 1,708.8Forex (0.5) 15.0 0.0 0.0 0.0Net cash/(debt) c/f 2,721.0 2,832.6 1,334.2 1,708.8 2,033.7

Key Ratios (YE 30 Jun) 2007 2008 2009F 2010F 2011F

Revenue growth (%) 46.5 63.8 4.5 5.0 5.6EBITDA growth (%) 49.6 56.4 -3.1 -0.8 10.6Pretax margins (%) 22.2 21.1 17.3 16.2 17.2Net profit margins (%) 16.6 15.2 12.0 11.2 12.0Interest cover (x) 19.0 25.3 15.6 15.1 18.1Effective tax rate (%) 19.8 24.3 24.0 23.0 23.0Net dividend payout (%) 20.6 34.3 35.5 40.7 44.8Trade debtors turnover (days) 38 37 20 20 20Stock turnover (days) 54 61 70 70 70Trade creditors turnover (days) 16 15 15 15 15

SIME DARBY

Fiona [email protected]

603 2036 2293


We are upgrading our recommendation for Sime DarbyBhd (Sime) from a SELL to BUY. The recent sharp up-ward rebound in crude palm oil (CPO) futures to RM1,800/tonne from RM1,400/tonne has led to an upward revisionin our sum-of-parts fair value from RM4.48/share toRM6.70/share.

Sime will immediately benefit from the upswing in CPOprices as it does not sell forward the group’s CPOproduction. We believe Sime would be able to achieve anaverage CPO price of RM2,000/tonne in FY09F’s, RM2,300/tonne in FY10F’s and RM2,500/tonne in FY11F’s. Ourprevious assumptions were RM1,700/tonne for FY09F’sand RM1,800/tonne for FY10F’s.

Our revised CPO assumptions has resulted in a 31% and34% upgrade in our earnings projections to RM2,284milfor FY09F’s and RM2,869mil for FY10F’s. Instead of a 50%plunge in net profit in FY09F’s, we now expect a smallerdrop of 35%. Earnings would rebound by 26% in FY10F’s.

Another recent development that could have a significantpositive impact on Sime is the a joint-proposal withAirAsia Bhd to build a private low-cost carrier terminal(LCCT) at Sime’s Labu Estate. The Government of Malaysiahas given its blessings for the RM1.6bil project. Informationis sketchy at this point but our back-of-the envelopecalculations suggest that Sime could make a heftyRM904mil gain from sale of the required 1,200 hectareland to the consortium. The only caveat would be the riskof Sime taking up a major stake in LCCT, a business thathas no strategic fit to Sime’s existing operations.

We are maintaining our projections of a 43%-45% declinein profits from Sime’s property, motor and industrialdivisions in FY09F’s given the rapid deceleration of thedomestic and global economies. The plantation division isforecast to account for 72%-74% of the group operatingprofits in FY09F-FY10F’s.

We believe the recent rebound in the price of CPO, althoughnot likely to reach the high of RM4,486/tonne seen inMarch 2008, would trigger a re-rating of the stock. Sime’sshare price retreated 21% from RM6.30/share in mid-October 2008 to a low of RM5.00 in December after therelease of its 1QFY09’s results, suggesting that investorshave already discounted the 49% slash in Sime’s KPI netprofit to RM1.9bil for FY09F’s. Hence, the imminentupgrade of consensus earnings for Sime could result in amore positive sentiment towards the stock.

Our sum-of-part fair value is derived by pegging thegroup’s core plantation operations at 15x FY09F’searnings, its motor and heavy equipment divisions at 8x-9x PE and property and others at 10x-12x PE.

Price RM5.45Fair Value RM6.7052-week High/Low RM13.20/RM4.94

Key ChangesFair valueEPS

YE to June FY08 FY09F FY10F FY11F

Revenue (RM mil) 34,045 28,225 29,892 32,155Net Profit (RM mil) 3,512 2,284 2,869 3,322Core EPS (sen) 59.6 38.0 47.7 55.3EPS growth (%) 35.0 (36.3) 25.6 15.8Consensus EPS (sen) 37.4 38.9 44.4DPS (sen) 49.0 25.0 32.0 39.0PE (x) 9.1 14.3 11.4 9.9EV/EBITDA (x) 5.0 7.8 6.3 5.4Div yield (%) 9.0 4.6 5.9 7.2ROE (%) 18.0 10.3 12.2 13.3Net Debt/Equity (%) net cash net cash net cash net cash


Shares Outstanding (million) 6,009Market Cap (RMmil) 32,749Book value (RM/share) 3.61P/BV (x) 1.5ROE (%) 18.0Net Gearing (%) net cash

Major Shareholders Skim ASB 36.8%Permodalan Nasional Bhd 12.7%Employees Provident Fund Board 15.9%

Free Float (%) 35.0Avg Daily Value (RMmil) 53.1


Absolute (%) -16.7 -34.0 -56.4Relative (%) -12.1 -18.0 -29.1

Company Report

PP12247/6/2009/(021181)

CONGLOMERATE

(SIME MK, SIME.KL)


Upswing in CPO price to trigger re-rating BUY

(Upgraded)

12 January 2009

12 January 2009Sime Darby


UPGRADE TO BUY, FV OF RM6.70/SHARE

We are taking our recommendation for Sime Darby Bhd(Sime) up two notches from a SELL to BUY with a revisedfair value of RM6.70/share. Stock offers potential upside of23%.

We have turned positive on the stock as the recent reboundin the price of crude palm oil (CPO) has allowed for anupgrade of our earnings projections by31%-34% for FY09F-FY11F’s. As more join to revise earnings upwards, thehigher consensus net profit would see sentiment on thestock improve and provide catalyst for a re-rating of theshare price.

Another development that would have a significant re-rating impact would be the proposed low-cost carrierterminal (LCCT) KLIA East@Labu project. Our ballparkcalculations indicate potential gains of RM904mil from saleof the required 1,200ha land. A positive outcome on theLCCT project could potentially result in a major boost toproperty profits and help restore the stock’s luster.

BOTTOMING OF CPO PRICE BRINGS CHEER

CPO price has bottomed

CPO price for delivery in March 2008 is currently at RM1,920/tonne. This is a strong 44% rebound from the low ofRM1,331/tonne seen in October 2008. Although still farbelow the high of RM4,486/tonne in March 2008, webelieve CPO price has bottomed at RM1,500/tonne andthe recent recovery in price sustainable.

As a result, we have raised our CPO price assumptionsfrom RM1,700/tonne to RM2,000/tonne for FY09F’s andfrom RM1,800/tonne to RM2,300/tonne for FY10F’s. ForFY11F’s, we have factored in average CPO price ofRM2,500/tonne compared with RM2,200 previously.

Earnings upgrade of 31%-34% with rebound inprice of CPO

Sime will immediately benefit from the upswing in CPOprices as it does not sell forward the group’s CPO produc-tion. Having achieved an average CPO price of RM2,962/tonne for its first quarter ended 31 September 2008, webelieve an average of RM2,000/tonne for the whole ofFY09F’s is a possibility.

The upward adjustment in our CPO price assumptionsfiltered down to a 31%-34% boost to FY09F-FY10F’searnings. We now expect Sime to a post net profit ofRM2,284mil (YoY: -35%) for FY09F’s and RM2,869mil forFY10F’s. Our previous projections were RM1,741mil andRM2,147mil for the two years.

The higher selling prices would also have a positive impacton margins as production cost is expected to remain stableat RM1,133/tonne. Although fertiliser cost has not fallen bythe 40% that planters had hoped for, it is unlikely to risesubstantially in 2009. Fertiliser cost accounts for about60%-70% of production cost.

Upward revisions of street estimates, catalyst forre-rating

During the release of its 1QFY09’s results in November2008, management announced its sharply revised KPIswith projected net profit for FY09F’s slashed from RM3.7bilto RM1.9bil (YoY: -52%) with a return on equity (ROE) cutfrom 16.7% to 8.8%.

Management has indicated that its forecast earnings arebased on an assumption that the price of CPO wouldaverage at RM1,700/tonne for FY09F’s. Given the aver-age price of RM2,962/tonne achieved in 1QFY09, ourcalculations point to an average of RM1,500/tonne for theremaining three quarters for FY09F’s.

CHART 1: CPO PRICE VS CRUDE OIL

Source: MPOB

0

200

400

600

800

1,000

1,200

Jan-05

Jun-05

Nov-05

Apr-0

6

Sep-06

Feb-07

Jul-0

7

Dec-07

May-08

Oct-0

8

0

200

400

600

800

1,000

1,200

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



We believe that as more are convinced that the recent risein CPO price is sustainable, upward revisions in streetestimates of Sime’s earnings would lift investor sentimenton the stock and trigger a re-rating of the share price.

Capex spending to expand on refinery capacities

The global financial turmoil has prompted management tocut back on its earlier capex budget of between RM1.8biland RM2bil that would be mainly be spent on acquisition ofplantation landbank and building of refineries for its down-stream plantation operations.

Instead, land acquisition would be on an opportunisticbasis with management still on the look out for land atattractive prices. But Sime will proceed with plans toconstruct new refineries in North Port, Port Klang and inKalimantan, Indonesia as it is part of management’s strat-egy to balance the production between Sime’s upstreamand downstream activities. Currently, Sime outsources itsrefining activities to third parties as it does not havesufficient refining capacity. This has resulted in a squeezein margins as Sime loses between US$10/tonne to US$20/tonne when it outsources the refining.

Construction of its 600,000 tonne/year refinery in NorthPort has commenced and will boost Sime’s overall refiningcapacity to 1.5 million tonne/year from 800,000 tonnecurrently. The refinery, which will cost RM330mil, willenable Sime to process all its 600,00 tonne of CPOproduction in the central region of peninsular Malaysia.Work on the plant in Kalimantan is expected to start soon.It will have similar capacity of 600,000 tonnes/year.

Then in big markets like China, Sime has entered into astrategic tie-up with government-linked Dongguan SinograinOil & Grains Co Ltd (Dongguan). This is a strategic partner-ship as Dongguan has the facilities and storage that Simecan immediately leverage on that. Through Dongguan,Sime would also have immediate access to the Chinesemarket. Management is looking for similar partnership inEurope.

TABLE 1: SIME - PLANTATION STATISTICS

Source: Sime

Malaysia Indonesia TotalFY07 FY08 1QFY09 FY07 FY08 1QFY09 FY07 FY08 1QFY09

Average mature area (‘000 ha) 302.6 301.9 n.a. 175.0 175.7 n.a. 477.6 477.6 n.a.FFB production (million MT) 6.58 7.06 1.90 2.67 3.32 0.73 9.25 10.38 2.63FFB yield per mature ha (MT/ha) 21.8 23.4 6.3 15.3 18.9 4.1 19.4 21.7 5.5CPO production (million MT) 1.42 1.57 0.41 0.69 0.84 0.19 2.11 2.41 0.60CPO extraction rate (%) 20.7 20.7 20.8 22.9 22.3 22.7 21.4 21.1 21.3PK extraction rate (%) 5.2 5.1 5.1 4.5 4.4 4.5 5.0 4.8 4.9Ave CPO selling price (RM/tonne) 1,754 3,014 3,151 1,727 2,648 2,549 1,745 2,885 2,962Ave PK selling price (RM/tonne) 956 1,682 1,668 716 1,385 1,270 855 1,592 1,566

Plantation71%

Property7%

Industrial13%

Motors4%

Energy & Utilities4% General Trading & Others

1%

CHART 2: SIME - BREAKDOWN OF FY08 OPERATING PROFIT

Source: Sime



SUCCESSFUL PARADE OF HOMES, BUT LANDSALE AT LABU THE REAL KICKER

Parade of Homes raked in RM389mil sales

Following the success of its maiden nine-day “Parade ofHomes” property campaign in June 2008, Sime DarbyProperty launched its second instalment of Parade ofHomes over a one-month period that ended in mid-Decem-ber 2008. There was strong interest in properties in Sime’s10 townships in the Klang Valley area, namely AraDamansara, Bandar Bukit Raja, Bukit Jelutong, DenaiAlam, Melawati, Nilai Impian, Planters’ Haven, PutraHeights, Subang Jaya and USJ Heights. Nevertheless,softer market conditions led to lower sales of 241 proper-ties worth RM141mil compared with the RM248mil raked infrom the sale of 466 units of properties during the firstcampaign.

With cumulative sales of RM389mil, Sime’s property devel-opment division is off to a good start for FY09F’s. Still, webelieve it would be difficult for Sime to sustain propertydevelopment revenue at FY08’s RM1,262mil (See chart3). In light of the cutback in spending on consumerdiscretionaries, management said it is cautious and willstudy customers’ needs before launching any new proper-ties.

Successful implementation of KLIA East@Labuwould provide earnings kicker

The fortunes of its property division would improve signifi-cantly should the proposed private low-cost carrier termi-nal (LCCT) KLIA East@Labu proceeds without hitches. Inearly-January 2009, Sime announced that the Govern-ment of Malaysia has given its blessings for the proposedLCCT to be built at Sime’s Labu Estate. The new LCCT isexpected to be ready by 2011. Development of this privateLCCT would be undertaken by a consortium consisting ofSime, AirAsia, state governments and construction com-panies that would be involved in the project. Todate, theshare structure for the consortium has yet to be finalised.

KLIA East@Labu is a major positive for Sime’s efforts tomonetise the group’s cheap plantation landbank in Labuwhich otherwise has little development potential in the nextthree to five years. Sime has a 9,320ha landbank in Labu.Labu is 50km from Kuala Lumpur and 18km from KLIA.

Based on our back-of-the envelope calculations, the break-even cost the break-even cost for the land in Labu would beapproximately RM6.50 per square foot (including infra-structure and conversion costs). Assuming a commercialland value of about RM13.00 psf, similar to values forSepang, Sime would reap a RM904mil gain from the1,200ha piece of land. There would also be developmentprofits from construction of the LCCT terminal and runway.

Risks include AirAsia’s inability to raise the required fund-ing for its share of investment in the LCCT project. But withbacking from the state governments as well, there could besome financial support coming from that front.

The other caveat is Sime’s shareholding in the LCCTproject. We gathered that Sime’s equity interest in theconsortium that would own and manage the LCCT wouldbe between 8% and 10%. If true, this will certainly alleviateconcerns that the plantation giant would be involved in abusiness with no strategic fit to its existing operations.

INDUSTRIAL & MOTOR DIVISIONS BRACINGFOR TOUGH TIMES

Slower mining activities would drag down industrialdivision

Besides property development, two other operations withinthe group that are vulnerable to the current global eco-nomic downturn are its industrial and motor divisions.

Sime’s industrial operations, which derived 74% of FY08’soperating profits from Australasia (See chart 4), is likely tobe impacted by slowing activities in Australia’s miningindustry. Although coal prices have stayed relatively strong,

CHART 3: SIME - PROPERTY OPERATING PROFIT

Source: Sime

478

27

389

1853

5-

100

200

300

400

500

600

Property development Property mgmt & hospitality

RM m

il

FY07 FY08 1QFY09

CHART 4: SIME - INDUSTRIAL OPERATING PROFIT

Source: Sime

7047

27

501

6584

33

509

1656

4

172

-

100

200

300

400

500

600

Malaysia SE Asia China/HK Australasia

RM m

il

FY07 FY08 1QFY09



demand has fallen as companies reduce inventory, ordersand production levels. In Indonesia, PT United Tractors thelocal dealer for Komatsu heavy equipment, predicts thatsales of heavy equipment in Indonesia would fall 40% to6,000 units in 2009 mainly due to coal miners’ inability toobtain loans.

The only bright spot would be prospects of higher sales ofearth moving equipment in China given the Chinese gov-ernment’s US$586bil stimulus package with infrastructureconstruction being a major component. But the potentialincrease in sales for Sime’s operations in China would notbe sufficient to compensate for the expected fall in sales inAustralia.

Sime’s industrial division has exclusive Caterpillar distribu-tion rights for the sale and rental of Caterpillar heavyequipment, parts and service support in Malaysia, Singa-pore, Hong Kong SAR, Brunei, The People’s Republic ofChina (7 provinces), the states of Queensland and North-ern Territory of Australia, Papua New Guinea, New Cal-edonia, the Solomon Islands, Nauru, the Republic ofMaldives and Christmas Island (Indian Ocean). In FY08,this division accounted for 13% of Sime’s operating profits.

Motor unit to be hit by falling consumption spending

Sime’s motor operations, which are in Malaysia, Singa-pore, China including Hong Kong and Macau, Australia,New Zealand and Thailand (See chart 5), are also facingthe prospects of falling sales.

In the last few months of 2008, auto sales have taken abeating as slumping household wealth curbed consumerdemand while businesses were discouraged by the risk ofglobal recession. Motor vehicle sales in Hong Kong plunged37% YoY in November 2008 while the Australian Bureauof Statistics reported that sales of new motor vehicles inAustralia slid 5% in November 2008, the fifth straight monthof falls. Over in Malaysia, the downtrend in motor vehiclesales is also evident and our motor analyst is predicting a

17% decline in total industry volume for 2009 (See chart 6).Although motor sales in China are still projected to grow in2009, the rate of increase is expected to be significantlylower. Already, Toyota Motor Corp has cut its automobilesales forecast for China by 14% for 2009. The revised salestarget reflects a 20% YoY growth in sales, down from itsprevious forecast of 40%.

Some of the passenger car brands represented by Simeinclude BMW, Rolls-Royce and MINI, Peugeot, Ford, LandRover, Hyundai and Mitsubishi. In trucks and commercialvehicles, Sime represents Nissan, Renault, Mack, Hinoand Mitsubishi Fuso. The motor division accounted for 4%of Sime’s FY08’s operating profit.

CHART 5: SIME - MOTOR OPERATING PROFIT

Source: Sime

(86)

29

82

39

9

54

109

32

116

41

2

(100)

(50)

-

50

100

150

Malaysia SE Asia China/HK Australia/NZ

RM m

il

FY07 FY08 1QFY09

-

100,000

200,000

300,000

400,000

500,000

600,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F

Units

(80.0)

(60.0)

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

%

TIV % YoY

CHART 6: MALAYSIA - TOTAL INDUSTRY INDUSTRY

Source: MMTA



FINANCIALS

Positive impact on balance sheet

The better plantation profits would also have a positiveimpact on Sime’s balance sheet. Instead of slipping into anet debt position, albeit a small net debt of RM47mil, theupward revision in plantation profits would see Sime re-maining in a net cash position of RM513mil in FY09F(FY08: net cash of RM980mil).

Dividend forecast raised

With the upward revision in our earnings projections, ourdividend forecasts have also be raised. We now expectSime to pay gross DPS of 25 sen/share (revised from 20sen/share) in FY09F’s and 32 sen/share (revised from 24sen/share for FY10F’s.

At its current price of RM5.45/share, dividend yields wouldbe 5% and 6% for the two years, respectively.

VALUATION

Sum-of-Parts upgraded RM6.70/share

Reflecting the more positive outlook for CPO prices, wehave pegged Sime’s plantation earnings at a higher PE of15x, compared with 13x previously. This is in line with themultiple used to value IOI Corp and Kuala Lumpur Kepong.The plantation division account for 79% of our NAVcomputation.

We have lowered the PE multiples for Sime’s industrial andmotor divisions to 8x-9x ( from 10x previously) and 10x(from 12x) for the group’s Energy & Utilities operations.The lower PE targets take into consideration the weakerprospects of these operations.

Nevertheless, thanks to the improved outlook of theplantation division, our sum-of-parts valuation for Sime israised from RM4.48/share to RM6.70/share.

Division Net Profit FY10F PE Value NAV(RM mil) (x) (RM mil) Breakdown (%)

Plantation 2,131.6 15.0 31,973.3 79.3Property 174.6 12.0 2,094.7 5.2Industrial 271.3 8.0 2,170.7 5.4Motors 107.4 9.0 966.9 2.4Energy & Utilities 156.4 10.0 1,563.9 3.9General Trading & Others 23.6 10.0 235.9 0.6

2,864.9 39,005.4Net Cash & Other Assets 1,297.0 3.2Total 40,302.4 100.0

Shares Issued (million) 6,009.5NAV/share (RM) 6.71Premium/(discount) - % -Fair value (RM) 6.71Implied FY09F PE (x) 17.6

Current share price (RM) 5.45Upside (%) 23.1

TABLE 3: SIME - SUM-OF-PARTS VALUATION

Source: Sime, AmResearch estimates

YE 30 Jun (RM mil) 2007 2008 2009F 2010F 2011F

Plantation 1,620.6 3,874.0 2,394.4 3,045.1 3,448.3Property 505.0 407.0 231.1 249.4 277.6Industrial 644.9 687.3 372.4 387.6 438.0Motors 63.1 203.2 115.2 153.5 192.3Energy & Utilities 221.5 224.6 181.1 223.4 265.3General Trading & Others 30.6 30.9 30.2 33.7 32.1Operating Profit 3,085.7 5,427.0 3,324.4 4,092.7 4,653.7

Percentage of total (%)Plantation 52.5 71.4 72.0 74.4 74.1Property 16.4 7.5 7.0 6.1 6.0Industrial 20.9 12.7 11.2 9.5 9.4Motors 2.0 3.7 3.5 3.8 4.1Energy & Utilities 7.2 4.1 5.4 5.5 5.7General Trading & Others 1.0 0.6 0.9 0.8 0.7

100.0 100.0 100.0 100.0 100.0

TABLE 2: SIME - BREAKDOWN OF OPERATING PROFITS






Income Statement (RMmil, YE Jun) 2007 2008 2009F 2010F 2011F

Revenue 28,230.2 34,044.7 28,225.1 29,892.1 32,155.3EBITDA 3,820.3 6,162.9 4,114.1 4,947.3 5,599.9Depreciation (734.6) (735.9) (789.7) (854.6) (946.2)Operating income (EBIT) 3,085.7 5,427.0 3,324.4 4,092.7 4,653.7Other income & associates (50.4) (49.4) (48.4) (47.4) (46.4)Net interest (93.1) (7.4) (14.7) (3.0) 51.0Exceptional items 630.1 (59.2) (15.1) (5.5) (4.0)Pretax profit 3,572.2 5,206.4 3,234.5 4,063.7 4,698.1Taxation (889.1) (1,453.9) (808.6) (1,015.9) (1,174.5)Minorities/pref dividends (297.4) (240.4) (142.3) (178.8) (202.0)Net profit (reported) 2,385.7 3,512.1 2,283.6 2,869.0 3,321.6

Balance Sheet (RM mil, YE Jun) 2007 2008 2009F 2010F 2011F

Fixed assets 9,865.5 10,617.1 11,094.8 12,140.2 13,193.9Intangible assets 86.5 81.0 105.3 105.3 105.3Other long-term assets 5,567.0 5,694.9 5,582.6 5,397.0 5,035.3Total non-current assets 15,519.0 16,393.0 16,782.7 17,642.5 18,334.6Cash & equivalent 5,666.0 5,994.2 6,319.3 6,652.6 7,134.3Stock 4,519.8 5,065.7 4,093.3 4,594.4 5,123.6Trade debtors 4,968.4 5,833.4 4,639.7 4,913.8 5,285.8Other current assets 2,540.6 2,686.4 3,078.5 2,363.1 1,855.3Total current assets 17,694.8 19,579.7 18,130.9 18,523.8 19,399.0Trade creditors 5,605.4 7,038.7 4,093.3 4,241.0 4,520.8Short-term borrowings 2,399.3 1,639.9 1,939.9 1,689.9 1,489.9Other current liabilities 592.4 628.9 672.9 809.6 946.5Total current liabilities 8,597.1 9,307.5 6,706.0 6,740.5 6,957.2Long-term borrowings 3,706.8 3,189.1 3,689.1 3,389.1 3,089.1Other long-term liabilities 1,355.8 1,271.2 1,156.7 1,248.3 1,335.0Total long-term liabilities 5,062.6 4,460.3 4,845.8 4,637.4 4,424.1Shareholders’ funds 17,354.3 21,668.6 22,825.4 24,252.2 25,816.0Minority interests 2,199.8 536.3 536.3 536.3 536.3BV/share (RM) 3.15 3.61 3.80 4.04 4.30

Cash Flow (RM mil, YE Jun) 2007 2008 2009F 2010F 2011F

Pretax profit 2,683.1 3,752.5 3,234.5 4,063.7 4,698.1Depreciation 734.6 735.9 789.7 854.6 946.2Net change in working capital (153.8) (711.5) (1,013.1) (847.1) (901.0)Others (394.1) 9.8 56.1 58.3 (64.0)Cash flow from operations 2,869.8 3,786.7 3,067.1 4,129.6 4,679.4Capital expenditure (1,391.3) (1,910.7) (1,200.0) (1,900.0) (2,000.0)Net investments & sale of fixed assets (408.3) (1,419.0) (1,235.0) (1,900.0) (2,000.0)Others 1,962.3 2,217.3 1,250.0 1,900.0 2,000.0Cash flow from investing 162.7 (1,112.4) (1,185.0) (1,900.0) (2,000.0)Debt raised/(repaid) (286.6) (931.9) 800.0 (550.0) (500.0)Equity raised/(repaid) 678.5 48.7 20.0 - -Dividends paid (1,336.7) (921.8) (2,298.7) (1,216.9) (1,532.4)Others (317.6) (774.2) (155.0) (224.7) (258.4)Cash flow from financing (1,262.4) (2,579.2) (1,633.6) (1,991.6) (2,290.8)Net cash flow 1,770.1 95.1 248.5 238.0 388.6Ending net cash/(debt) 5,625.2 5,809.2 6,142.1 6,467.1 6,940.1

Key Ratios (YE Jun) 2007 2008 2009F 2010F 2011F

Revenue growth (%) 20.6 (17.1) 5.9 7.6EBITDA growth (%) 61.3 (33.2) 20.3 13.2Pretax margins (%) 12.7 15.3 11.5 13.6 14.6Net profit margins (%) 8.5 10.3 8.1 9.6 10.3Interest cover (%) 41.0 832.8 n.m. n.m. n.m.Effective tax rate (%) 24.9 27.9 25.0 25.0 25.0Net dividend payout (%) 65.4 49.3 50.3 52.9Debtors turnover (days) 57.9 60.0 60.0 60.0Stock turnover (days) 61.1 60.0 65.0 68.0Creditors turnover (days) 80.6 60.0 60.0 60.0

KL KEPONG


lllll Upgrade to BUY with higher RNAV-based fair value ofRM11.90/share. Like IOI Corporation, our upward revisionin Kuala Lumpur Kepong’s (KLK) fair value accounts forhigher CPO (crude palm oil) price assumption and planta-tion margin. We have also used a PE of 15x to arrive atKLK’s fair value.

lllll KLK has hedged some of its FY09F CPO sales. The groupsold forward 40% of its 1QFY09 CPO production at aboutRM2,000/tonne. For the full financial year, KLK believesthat its selling price would not fall below RM1,600/tonneas the group is expecting the price of CPO to recover.KLK’s view is that CPO price would rise to RM1,600/tonneto RM1,700/tonne by 2Q2009 (which it already has). Driv-ing the price of CPO up is improved demand from Chinaahead of the festive period and stockpiling of inventoryby provincial governments.

lllll KLK was not affected by the recent defaults in CPO deliv-eries by Chinese and Indian importers as most of thegroup’s refined palm products are sold to its oleochemicalunits in China and Europe. Like IOI, KLK also sells to es-tablished companies like Cargill or Proctor and Gamble.

lllll Although it was reported recently that KLK and a few otherlarge plantation companies were mulling reducing fertiliserapplication as fertiliser costs have not fallen as much asCPO price, we understand that the actual amount offertiliser being reduced would depend on recommenda-tion from the in-house agronomist. Currently, KLK’s oper-ating cost is about RM1,100/tonne, similar to IOI and SimeDarby.

lllll If economic conditions recover, then KLK would not berecording anymore impairment charges for its subsidiary,Davos Life Science Pte Ltd (incorporated in Singapore).However, there would not be any write-backs of impair-ment either. To recap, KLK chalked up a RM74mil impair-ment charge for Davos Life Science in FY08.

lllll Capex is forecast at RM400mil to RM500mil for FY09F. Outof this, about half are in respect of new plantings in Indo-nesia. KLK intends to develop about 10,000 ha of land inIndonesia in FY09F. Plantation development expenditureis approximately RM15,000/ha.

lllll As for the outlook for the rubber division, KLK believesthat rubber price would follow the trend of crude oil price.In spite of potentially slower demand for tyres from China’sautomobile industry, we reckon that the main determinantfor rubber prices would be crude oil price. Hence, as crudeoil price recover, rubber prices should follow suit. KLK’srubber division generated about RM100mil in profits inFY08.

Price RM10.00

Fair Value RM11.90


Key Changes

Target price Ý

EPS Ý

YE to Sep FY08 FY09F FY10F FY11F

Revenue (RMmil) 7,855.4 6,185.2 6,973.9 7,649.7Net Profit (RMmil) 1,040.7 770.0 931.1 1,119.6EPS (sen) 97.5 72.1 87.2 104.9EPS growth (%) 49.9 (26.0) 20.9 20.2Consensus net profit (RMmil) 933.7 664.4 702.8 706.3DPS (sen) 70.0 40.0 45.0 50.0PE (x) 10.3 13.9 11.5 9.5EV/EBITDA (x) 6.5 8.7 7.1 5.8Div yield (%) 7.0 4.0 4.5 5.0ROE (%) 19.9 13.3 14.8 16.1Net gearing (%) 11.2 Net cash Net cash Net cash


Shares Outstanding (million) 1,067.5

Market Cap (RMmil) 10,675.0


ROE (%) 19.9


Major Shareholders Batu Kawan Bhd (46.6%)

EPF (8.6%)Free Float (%) 53.4



Absolute (%) +19.0 -35.1 -46.2Relative (%) +25.5 -19.5 -12.7

Company Report

PP12247/6/2009/(021181)

PLANTATION

(KLK MK, KLKK.KL)


For CPO and rubber exposure

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009KL Kepong




Income Statement (RMmil, YE 30 Sep) 2007 2008 2009F 2010F 2011F

Revenue 5,067.6 7,855.4 6,185.2 6,973.9 7,649.7EBITDA 953.8 1,742.1 1,270.8 1,528.2 1,789.0Depreciation (164.9) (196.6) (228.4) (260.1) (291.9)Operating income (EBIT) 788.9 1,545.5 1,042.4 1,268.1 1,497.1Other income & associates 31.9 42.2 46.5 51.1 56.2Net interest (23.6) (40.1) (51.9) (48.2) (45.4)Exceptional items 89.3 (102.1) - - -Pretax profit 886.5 1,445.5 1,037.0 1,271.0 1,507.9Taxation (172.0) (356.0) (259.2) (330.5) (377.0)Minorities/pref dividends (20.3) (48.9) (7.8) (9.4) (11.3)Net profit 694.2 1,040.7 770.0 931.1 1,119.6Core net profit 604.9 1,142.8 770.0 931.1 1,119.6

Balance Sheet (RMmil, YE 30 Sep) 2007 2008 2009F 2010F 2011F

Fixed assets 2,093.2 2,372.0 2,596.3 2,759.5 2,888.7Intangible assets 321.1 300.5 263.6 232.7 206.4Other long-term assets 2,243.4 2,522.1 2,575.6 2,634.2 2,698.1Total non-current assets 4,657.7 5,194.6 5,435.5 5,626.3 5,793.2Cash & equivalent 495.6 1,159.7 1,425.4 1,633.9 2,046.2Stock 982.7 1,220.0 1,144.5 1,268.2 1,364.8Trade debtors 540.3 605.7 593.1 668.7 733.5Other current assets 327.0 330.3 377.0 425.6 469.1Total current assets 2,345.6 3,315.7 3,539.9 3,996.4 4,613.6Trade creditors 254.3 347.8 269.3 298.4 321.1Short-term borrowings 493.9 859.0 846.9 835.6 824.9Other current liabilities 364.8 395.2 489.6 533.3 567.4Total current liabilities 1,113.0 1,602.0 1,605.8 1,667.3 1,713.5Long-term borrowings 566.9 920.8 911.6 902.5 893.5Other long-term liabilities 228.2 247.4 247.7 248.0 248.2Total long-term liabilities 795.1 1,168.3 1,159.3 1,150.5 1,141.7Shareholders’ funds 4,919.1 5,537.1 5,999.6 6,584.9 7,320.2Minority interests 176.2 202.9 210.7 220.1 231.4BV/share (RM) 4.61 5.19 5.62 6.17 6.86

Cash Flow (RMmil, YE 30 Sep) 2007 2008 2009F 2010F 2011F

Pretax profit 886.5 1,445.5 1,037.0 1,271.0 1,507.9Depreciation 164.9 196.6 228.4 260.1 291.9Net change in working capital (501.7) (604.3) (207.0) (510.9) (530.4)Others (98.0) (208.4) 0.0 0.0 0.0Cash flow from operations 451.6 829.4 1,058.3 1,020.2 1,269.4Capital expenditure (393.7) (400.0) (400.0) (400.0) (400.0)Net investments & sale of fixed assets 34.0 149.9 (28.9) (31.8) (34.9)Others (437.4) (299.3) (8.2) (13.6) (18.1)Cash flow from investing (797.0) (549.4) (437.1) (445.3) (453.0)Debt raised/(repaid) 673.9 838.8 (21.3) (20.4) (19.6)Equity raised/(repaid) 0.0 1.0 2.0 3.0 4.0Dividends paid (299.4) (457.3) (307.4) (345.9) (384.3)Others 1.7 (3.0) 0.0 0.0 0.0Cash flow from financing 376.2 379.5 (326.8) (363.3) (400.0)Net cash flow 30.8 659.6 294.4 211.5 416.4Net cash/(debt) b/f 1,220.4 2,721.0 2,879.7 1,247.9 1,370.3Forex 0.0 2.0 0.0 0.0 0.0Net cash/(debt) c/f 1,251.3 3,382.6 3,174.1 1,459.5 1,786.6

Key Ratios (YE 30 Sep) 2007 2008 2009F 2010F 2011F

Revenue growth (%) 29.4 55.0 -21.3 12.8 9.7EBITDA growth (%) 52.1 82.7 -27.1 20.3 17.1Pretax margins (%) 17.5 18.4 16.8 18.2 19.7Net profit margins (%) 13.7 13.2 12.4 13.4 14.6Interest cover (x) 40.4 43.4 24.5 31.7 39.4Effective tax rate (%) 21.6 23.0 25.0 26.0 25.0Net dividend payout (%) 56.6 51.7 39.9 37.1 34.3Trade debtors turnover (days) 39 28 35 35 35Stock turnover (days) 87 73 85 85 85Trade creditors turnover (days) 23 21 20 20 20

WILMAR INT


lllll Upgrade to BUY with revised fair value of S$4.00/sharebased on FY09F’s PE of 15x. Wilmar International is a proxyto an economic rebound in China based on its large op-erations and market share of packed cooking oils in thecountry. About half of Wilmar’s pretax profits are fromChina. The group’s market share of branded cooking oilsin China is roughly 50%.

lllll Wilmar believes that defaults of CPO (crude palm oil) ship-ments have stabilised and going forward, demand for palmoil for the coming festivities in China should support CPOprices. During our company visit, Wilmar declined to givea price forecast or comment on its hedging policy. Butlooking at the group’s track record, Wilmar has a knackfor reading the market well.

lllll Due to economies of scale where Wilmar is the largestpalm oil refiner in the world and one of the biggest up-stream players, we reckon that the group would be one ofthe earliest beneficiaries of an uptick in CPO prices. As anindication of its size, Wilmar’s annual palm refining ca-pacity in Malaysia is 4.5 million tonne compared to IOICorporation’s 2.5 million tonne, Sime Darby’s 1.6 milliontonne and Kuala Lumpur Kepong’s 700,000 tonne.

lllll Unlike other plantation companies, which lock-in theirfertiliser supply as far ahead as six months, Wilmar onlybuys its fertiliser requirements three to six months ahead.The group has indicated that despite relatively highfertiliser costs, it will not be cutting down on fertiliser ap-plication. We understand that less than 50% of the group’sfertiliser are from its own plant. Recall that Wilmar has afertiliser plant with production capacity of 450,000 tonne/year.

lllll Currently, Wilmar’s operating cost is about US$350/tonne(RM1,225/tonne). This is above the production costs of thelarge Malaysian players of RM1,100/tonne. We attributeWilmar’s higher operating costs to its young trees and in-frastructure costs for the new Indonesian plantings.

lllll Wilmar is expected to increase its biodiesel productioncapacity by 600,000 tonne/year to 800,000 tonne/year. Thenew biodiesel plant would most likely be in Indonesia totake advantage of the opportunity that arises should thecountry implement its biodiesel policy of 1% blend for thetransportation sector and 2.5% blend for industrial users.

lllll Due to the current financial crisis, Wilmar’s capex has beenreduced from US$1bil to a range of US$800mil to US$1bilfor FY09F. The bulk of the capex are expected to go to-wards plantation development and construction of newpalm refining and biodiesel capacities.

Price S$2.96

Fair Value S$4.00

52-week High/Low S$1.76-RM5.72

Key Changes

Target price Ý

EPS Ý

YE to Dec FY07 FY08F FY09F FY10F

Revenue (US$mil) 16,466.2 25,794.2 22,180.0 28,745.9Net Profit* (US$mil) 491.9 1,418.0 1,252.3 1,439.5EPS* (US cents) 9.1 22.2 19.6 22.5FD EPS (US cents) 9.1 21.7 19.1 22.0EPS growth* (%) 15.9 144.3 (11.7) 14.9Consensus net profit (US$mil) 0.0 1,368.2 1,121.1 1,273.8DPS (S$ cents) 2.6 4.0 4.5 5.0PE (x) 21.7 8.9 10.1 8.8FD PE (x) 21.7 9.1 10.3 9.0Div yield (%) 0.9 1.4 1.5 1.7ROE (%) 13.3 16.8 13.0 13.4Net Gearing (%) 51.8% 55.4% 38.5% 43.2%*excludes changes in fair value of biological assets


Shares Outstanding (million) 6,385.7Market Cap (S$mil) 18,901.6

Book value (US$/share) 1.23

P/BV (x) 2.4ROE (%) 7.4


Major Shareholders Wilmar Holdings Pte Ltd

(48.2%)

PPB Group Bhd (18.2%)Free Float (%) 33.6

Avg Daily Value (S$mil) 28.7


Absolute (%) +48.0 -39.6 -47.5Relative (%) +55.7 2.2 -3.7

Company Report

PP12247/6/2009/(021181)

AGRIBUSINESS

(WIL SP, WIL.SI)


Proxy to recovery in China

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009Wilmar International




Income Statement (US$mil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Revenue 7,016.0 16,466.2 25,794.2 22,180.0 28,745.9EBITDA 386.1 859.6 1,896.7 1,959.9 2,375.8Chg in FV of biological assets 17.4 123.5 0.0 0.0 0.0Depreciation (73.3) (133.7) (142.8) (172.8) (202.8)Operating income (EBIT) 330.2 849.4 1,753.8 1,787.1 2,173.0Other income & associates 46.3 135.6 250.0 10.0 10.0Net interest (87.7) (155.2) (356.3) (355.7) (372.6)Exceptional items 0.0 0.0 0.0 0.0 0.0Pretax profit 288.7 829.8 1,647.6 1,441.4 1,810.3Taxation (32.3) (154.6) (296.6) (259.5) (325.9)Minorities/pref dividends (40.5) (94.8) 67.0 70.4 (45.0)Net profit 215.9 580.4 1,418.0 1,252.3 1,439.5Core net profit 198.6 456.9 1,418.0 1,252.3 1,439.5

Balance Sheet (US$mil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Fixed assets 1,154.2 2,556.8 3,014.0 3,441.1 3,838.3Intangible assets 43.4 3,961.3 4,028.0 4,028.0 4,028.0Other long-term assets 499.2 1,877.5 2,123.0 1,989.3 2,431.7Total non-current assets 1,696.8 8,395.7 9,165.1 9,458.5 10,298.0Cash & equivalent 298.6 967.6 1,527.1 3,214.5 2,817.7Stock 968.4 3,614.1 5,300.2 4,861.4 6,300.5Trade debtors 467.4 1,501.2 2,120.1 1,823.0 2,362.7Other current assets 421.7 1,028.5 1,435.1 1,317.3 1,621.0Total current assets 2,156.1 7,111.4 10,382.5 11,216.2 13,101.8Trade creditors 391.7 1,001.9 1,840.8 1,561.7 2,033.4Short-term borrowings 1,510.5 4,209.1 5,261.4 5,787.6 6,366.3Other current liabilities 218.6 957.8 1,440.6 1,300.3 1,673.4Total current liabilities 2,120.8 6,168.8 8,542.8 8,649.5 10,073.1Long-term borrowings 114.8 818.8 1,299.8 1,325.8 1,352.3Other long-term liabilities 635.4 337.9 354.8 372.6 391.2Total long-term liabilities 750.2 1,156.7 1,654.6 1,698.4 1,743.5Shareholders’ funds 857.3 7,845.2 9,080.8 10,127.8 11,339.2Minority interests 124.7 336.3 269.3 199.0 244.0BV/share (US$) 0.34 1.23 1.42 1.59 1.78

Cash Flow (US$mil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Pretax profit 288.7 829.8 1,647.6 1,441.4 1,810.3Depreciation 73.3 133.7 142.8 172.8 202.8Net change in working capital (255.5) (2,056.8) (1,887.4) (46.6) (2,010.8)Others 67.0 67.8 246.3 240.2 251.4Cash flow from operations 173.6 (1,025.5) 149.2 1,807.8 253.8Capital expenditure (356.6) (544.5) (1,000.0) (900.0) (900.0)Net investments & sale of fixed assets 63.1 16.1 9.4 9.4 9.3Others (61.9) (2.0) 328.1 338.9 350.8Cash flow from investing (355.5) (530.4) (662.4) (551.7) (539.9)Debt raised/(repaid) 91.9 2,245.8 1,533.3 552.1 605.3Equity raised/(repaid) 172.6 0.0 0.0 0.0 0.0Dividends paid (8.4) (51.8) (116.0) (182.4) (205.3)Others (81.0) (192.1) (7.1) (7.3) (7.5)Cash flow from financing 175.1 2,001.9 1,410.3 362.4 392.5Net cash flow (6.8) 446.0 897.1 1,618.6 106.4Net cash/(debt) b/f 5.7 (1.1) 444.9 1,342.0 2,960.6Forex 0.0 0.0 0.0 0.0 0.0Net cash/(debt) c/f (1.1) 444.9 1,342.0 2,960.6 3,067.0

Key Ratios (YE 31 Dec) 2006 2007 2008F 2009F 2010F

Revenue growth (%) 50.8 134.7 56.6 -14.0 29.6EBITDA growth (%) 162.0 122.6 120.6 3.3 21.2Pretax margins (%) 4.1 5.0 6.4 6.5 6.3Net profit margins (%) 3.1 3.5 5.5 5.6 5.0Interest cover (x) 4.4 5.5 5.3 5.5 6.4Effective tax rate (%) 11.2 18.6 18.0 18.0 18.0Net dividend payout (%) 10.0 20.0 12.9 16.4 15.8Trade debtors turnover (days) 24 33 30 30 30Stock turnover (days) 50 80 75 80 80Trade creditors turnover (days) 23 25 30 30 30

12 January 2009Wilmar International


The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed orrecommended in this report may not be suitable for all investors. This report has been prepared for informationpurposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees ofAmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members ofthe AmInvestment Group and their affiliates may provide services to any company and affiliates of such companieswhose securities are mentioned herein. The information herein was obtained or derived from sources that we believeare reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair andreasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liabilitycan be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this reportconstitute our judgement as of this date and are subject to change without notice.

For AmResearch Sdn Bhd

Fiona LeongExecutive Director

This report is prepared by AmResearch Sdn Bhd (“ASB”) only for distribution and publication in Malaysia.

Where this report is distributed or published in Singapore, such distribution or publication is by AmFraser Securities PteLtd (“AmFraser”) (acting as principal and not as agent or representative of ASB) which accepts sole responsibility for thecontents of this report, as if this report was prepared and issued by AmFraser.

This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legalrelations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circula-tion. It does not have regard to the specific investment objectives, financial situation and the particular needs of anyrecipient hereof. You should independently evaluate particular investments and consult an independent financial adviserbefore dealing in any securities mentioned in this report.

This report may not be published, circulated, reproduced or distributed in whole or in part to any other person without ourwritten consent. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside(i) Singapore or (ii) such other jurisdiction as AmFraser may determine in its absolute discretion, where its distribution,publication or use would be contrary to applicable law or would subject AmFraser and its related corporations (whichincludes ASB), connected persons, associated persons and/or affiliates (collectively “AmFraser”) to any registration, li-censing or other requirements within such jurisdiction.

The information or views in the report (“Information”) has been obtained or derived from sources believed by AmFraser tobe reliable. However, AmFraser makes no representation as to the accuracy or completeness of such sources or theInformation and AmFraser accepts no liability whatsoever for any loss or damage arising from the use of or reliance on theInformation. AmFraser may have issued other reports expressing views different from the Information and all views ex-pressed in all reports of AmFraser are subject to change without notice. AmFraser reserves the right to act upon or use theInformation at any time, including before its publication herein.

AmFraser and its directors, officers, employees and representatives may, to the extent permitted by law, transact with,perform broking, underwriting or other services for or solicit business from, the issuer(s) or other persons in respect of,and/or have a position or holding, or other material interest, or effect transactions in, the securities referred to in this reportor other investments related thereto.

INDOFOOD AGRI


lllll We are upgrading Indofood Agri-Resources to BUY basedon fair value of S$1.00/share. This is derived using aFY09F’s PE of 12x on revised earnings. Our upward earn-ings revision accounts for higher CPO (crude palm oil)price and plantation margins.

lllll Indofood is expected to continue with its efforts to reduceoperating costs from the less efficient PP London Sumatra(LonSum). These include sourcing higher quality seedlingsfrom LonSum, combined fertiliser and diesel policies be-tween LonSum and Indofood and improving the infrastruc-ture at LonSum’s oil palm estates.

lllll During the recent CPO price downturn, Indofood was theonly company in our coverage except for TH Plantations,which expanded its landbank. The group acquiredgreenfield landbank amounting to 82,300 ha in November2008 for US$9mil or about US$104/ha. We view the acqui-sition positively as it would expand Indofood group’slandbank to 538,210 ha, out of which only about one-thirdare planted.

lllll Apart from palm oil, Indofood is also branching out intothe sugar business, which is only expected to contributeto earnings in FY12F. The group would be starting on itssugar cane planting soon. Indofood plans to completeplanting on 18,600 ha by FY11F. Planting cost for sugarcane plantations is about US$1,200/ha, which is lower thanpalm oil’s US$4,000/ha to US$5,000/ha. To recap, Indofoodacquired 37,500 ha of land earmarked for sugar cane plan-tations for approximately US$37mil or US$997/ha.

lllll Indofood also provides exposure to the cooking oil busi-ness in Indonesia. In terms of volume, the group’s brandedcooking oil such as Bimoli and Bimoli Spesial commandmarket share of 46% in 1H2008. We understand thatIndofood is the price leader in Indonesia, adjusting for costincreases before its other competitors follow suit.

lllll Among the companies under our coverage, Indofood hasthe largest exposure to rubber. The group has about 22,000ha of rubber landbank, out of which about 80% to 90% arealready mature.

lllll Due to the current financial crisis, Indofood has reducedits palm oil planting programme from 35,000 ha to 30,000ha annually. This is in line with the smaller plantingprogrammes indicated by the major plantation companiesduring our recent round of company visits.

lllll In terms of earnings, we forecast the plantation division toaccount for 85% of group operating profit in FY09F, fol-lowed by the cooking oil division (13%) and commodities(2%). We estimate a gross dividend per share of 1.0Singapore cents for FY09F, which implies a payout of 5%(FY08F: 14%).

Price S$0.625

Fair Value S$1.00

52-week High/Low S$0.37-S$3.17

Key Changes

Target price Ý

EPS Ý


Revenue (Rpbil) 6,505.6 10,784.6 11,115.6 13,754.7Net Profit* (Rpbil) 763.8 1,282.5 692.0 966.0EPS* (S$ cents) 9.0 15.2 8.2 11.4EPS* (Rph) 61.4 88.6 47.8 66.7EPS growth (%) 423.4 44.2 (46.0) 39.6Consensus net profit (Rpbil) 673.2 1,577.7 987.9 1,146.1DPS (S$ sen) 0.0 5.0 1.0 2.0PE (x) 5.9 4.1 7.6 5.5EV/EBITDA (x) 15.3 8.1 11.4 10.2Div yield (%) 0.0 8.0 1.6 3.2ROE (%) 17.9 16.6 8.0 10.2Net Gearing (%) 50.9% 42.8% 44.6% 46.7%*excludes changes in fair value of biological assets


Shares Outstanding (million) 1,447.8Market Cap (S$mil) 904.9

Book value (S$/share) 0.85

P/BV (x) 0.7ROE (%) 17.9

Net Gearing (%) 51

Major Shareholder PT Indofood Sukses Makmur

(69%)

Free Float (%) 31Avg Daily Value (S$mil) 10.5


Absolute (%) +19.1 -73.9 -78.0

Relative (%) +25.2 -32.6 -35.0

Company Report

PP12247/6/2009/(021181)

PLANTATION

(IFAR SP, IFAR.SI)


Reaping synergies from LonSum

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009Indofood Agri-Resources




Income Statement (Rpbil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Revenue 4,088.9 6,505.6 10,784.6 11,115.6 13,754.7EBITDA 800.9 1,529.2 3,200.5 2,515.4 3,160.4Chg in FV of biological assets 488.1 201.7 0.0 0.0 0.0Depreciation (111.3) (151.6) (170.3) (196.3) (222.3)Operating income (EBIT) 1,177.7 1,579.3 3,030.2 2,319.1 2,938.0Other income & associates 0.0 0.0 0.0 0.0 0.0Net interest (84.4) (13.7) (318.7) (305.3) (312.8)Exceptional items (2.2) (76.3) 0.0 0.0 0.0Pretax profit 1,091.1 1,489.2 2,711.5 2,013.8 2,625.2Taxation (351.6) (495.2) (894.8) (664.5) (866.3)Minorities/pref dividends (93.0) (104.9) (534.2) (657.3) (792.9)Net profit 646.5 889.1 1,282.5 692.0 966.0Core net profit 160.6 763.8 1,282.5 692.0 966.0

Balance Sheet (Rpbil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Fixed assets 830.6 1,945.8 2,425.5 2,879.2 3,306.9Intangible assets 114.9 174.1 3,083.8 3,083.8 3,083.8Other long-term assets 2,862.8 9,901.9 10,381.5 10,835.2 11,262.9Total non-current assets 3,808.4 12,021.8 15,890.9 16,798.2 17,653.6Cash & equivalent 565.9 1,701.5 2,786.3 4,006.3 5,392.7Stock 602.8 1,175.6 1,772.8 2,436.3 3,768.4Trade debtors 361.4 737.1 1,181.9 1,522.7 2,261.0Other current assets 247.8 265.9 292.5 321.7 353.9Total current assets 1,777.9 3,880.1 6,033.4 8,287.0 11,776.0Trade creditors 223.8 800.9 970.7 1,110.4 1,362.5Short-term borrowings 759.9 4,664.0 5,596.9 7,275.9 9,458.7Other current liabilities 39.3 459.1 698.6 723.7 1,108.7Total current liabilities 1,023.0 5,924.0 7,266.1 9,110.0 11,929.9Long-term borrowings 332.7 678.7 746.6 739.1 554.4Other long-term liabilities 769.3 2,387.8 2,397.6 2,397.6 2,397.6Total long-term liabilities 1,102.0 3,066.5 3,144.2 3,136.8 2,952.0Shareholders’ funds 2,794.4 7,155.7 8,314.3 8,981.5 9,898.0Minority interests 666.9 2,665.4 3,199.6 3,856.9 4,649.8BV/share (RM) 2.07 4.94 5.74 6.20 6.84

Cash Flow (Rpbil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Pretax profit 1,091.1 1,489.2 2,711.5 2,013.8 2,625.2Depreciation 111.3 151.6 170.3 196.3 222.3Net change in working capital (581.8) (677.1) (1,975.4) (1,702.1) (2,606.2)Others (407.8) 26.3 317.7 304.3 311.8Cash flow from operations 212.9 990.0 1,224.1 812.3 553.2Capital expenditure (166.8) (270.9) (300.0) (300.0) (300.0)Net investments/sale of fixed assets 145.0 197.5 10.0 10.0 10.0Others (74.1) (5,266.8) (850.0) (850.0) (850.0)Cash flow from investing (95.9) (5,340.2) (1,140.0) (1,140.0) (1,140.0)Debt raised/(repaid) 856.4 3,340.6 1,000.7 1,671.6 1,998.0Equity raised/(repaid) - 2,391.6 - - -Dividends paid - - - (123.9) (24.8)Others (925.9) (3.0) - - -Cash flow from financing (69.4) 5,729.3 1,000.7 1,547.7 1,973.2Net cash flow 47.6 1,379.1 1,084.8 1,220.0 1,386.4Net cash/(debt) b/f 274.7 322.3 1,701.5 2,786.3 4,006.3Net cash/(debt) c/f 322.3 1,701.5 2,786.3 4,006.3 5,392.7


Revenue growth (%) 13.9 98.4 51.1 -21.3 10.7EBITDA growth (%) -8.1 162.9 34.2 -31.7 10.7Pretax margins (%) 26.7 34.4 31.0 22.8 21.6Net profit margins (%) 15.8 24.9 22.4 15.6 14.7Interest cover (x) 9.5 22.9 26.4 15.5 14.7Effective tax rate (%) 32.2 22.6 23.0 23.0 23.0Net dividend payout (%) 0.0 5.9 6.4 5.9 6.0Trade debtors turnover (days) 32 41 40 50 60Stock turnover (days) 54 66 60 80 100Trade creditors turnover (days) 27 64 50 50 50

12 January 2009Indofood Agri-Resources


The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or

recommended in this report may not be suitable for all investors. This report has been prepared for information

purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of

AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of

the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies

whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe

are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and

reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability

can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report

constitute our judgement as of this date and are subject to change without notice.


Fiona Leong

Executive Director

This report is prepared by AmResearch Sdn Bhd (“ASB”) only for distribution and publication in Malaysia.

Where this report is distributed or published in Singapore, such distribution or publication is by AmFraser Securities Pte

Ltd (“AmFraser”) (acting as principal and not as agent or representative of ASB) which accepts sole responsibility for the

contents of this report, as if this report was prepared and issued by AmFraser.

This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal

relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circula-

tion. It does not have regard to the specific investment objectives, financial situation and the particular needs of any

recipient hereof. You should independently evaluate particular investments and consult an independent financial adviser

before dealing in any securities mentioned in this report.

This report may not be published, circulated, reproduced or distributed in whole or in part to any other person without our

written consent. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside

(i) Singapore or (ii) such other jurisdiction as AmFraser may determine in its absolute discretion, where its distribution,

publication or use would be contrary to applicable law or would subject AmFraser and its related corporations (which

includes ASB), connected persons, associated persons and/or affiliates (collectively “AmFraser”) to any registration, li-

censing or other requirements within such jurisdiction.

The information or views in the report (“Information”) has been obtained or derived from sources believed by AmFraser to

be reliable. However, AmFraser makes no representation as to the accuracy or completeness of such sources or the

Information and AmFraser accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the

Information. AmFraser may have issued other reports expressing views different from the Information and all views ex-

pressed in all reports of AmFraser are subject to change without notice. AmFraser reserves the right to act upon or use the

Information at any time, including before its publication herein.

AmFraser and its directors, officers, employees and representatives may, to the extent permitted by law, transact with,

perform broking, underwriting or other services for or solicit business from, the issuer(s) or other persons in respect of,

and/or have a position or holding, or other material interest, or effect transactions in, the securities referred to in this report

or other investments related thereto.

ASIATIC DEVELOPMENT


lllll We initiate coverage on Asiatic Development with a BUYrecommendation and fair value of RM6.00/share, which isbased on a FY09F’s PE of 15x. In our FY09F’s earningsforecast, we have assumed an average CPO price ofRM2,000/tonne compared to FY08F’s estimated RM2,800/tonne to RM3,000/tonne.

lllll As such, FY09F’s net profit is estimated to decline 29%before improving by 19% in FY10F. Asiatic stands to ben-efit from a recovery in CPO prices as it sells its CPO mainlyon spot prices.

lllll Asiatic is one of the more efficient listed plantation com-panies. In 9MFY08, the group recorded operating cost ofRM1,040/tonne, which is marginally lower than IOICorporation’s (IOI) and Kuala Lumpur Kepong’s (KLK)RM1,100/tonne. Going forward, Asiatic expects its operat-ing costs to increase to RM1,200/tonne in FY09F due tohigher fertiliser costs locked in FY07.

lllll Asiatic is slowly stepping up its new plantings in Indone-sia. In FY09F, the group plans to plant 8,000 ha of oil palmin West Kalimantan and 12,000 ha in Central Kalimantancompared to FY08F’s estimated 6,500 ha.

lllll This brings Asiatic’s new plantings in Indonesia to 20,000ha in FY09F. This is higher than IOI’s revised plantingprogramme of 5,000 ha to 7,000 ha in Indonesia next yearand KLK’s 10,000 ha per year. Plantation development ex-penditure is about RM14,000/ha.

lllll Recently, Asiatic indicated that it may be reducing itsfertiliser tender for FY09F by 15%. This is because thegroup still has ample supply of fertiliser carried forwardfrom FY07 and FY08F. Asiatic did not fully apply its fertiliserin FY07 due to the rainy season.

lllll In contrast to reports that there would be tree stress, weunderstand that Asiatic’s FFB (fresh fruit bunches) pro-duction is expected to increase 4% to 5% in FY09F. Al-though there was a delay in cropping pattern in 3QFY08,which led to lower output, FFB production in the last twomonths of FY08F have been positive.

lllll Foreign shareholding was 9% as of November 2008 ver-sus 12% as of early-September 2008. The decline in for-eign shareholding indicates the strong likelihood that for-eign selling might have abated.

Price RM4.20

Fair Value RM6.00


Key Changes

Target price Initiate coverage

EPS Initiate coverage


Revenue (RMmil) 906.4 1,068.2 776.0 928.7

Net Profit (RMmil) 344.1 426.7 303.3 362.0

EPS (sen) 45.6 56.5 40.2 47.9EPS growth (%) 100.8 24.0 (28.9) 19.4

Consensus net profit (RMmil) 420.2 277.6 318.6

DPS (sen) 14.0 16.0 18.0 20.0PE (x) 9.2 7.4 10.5 8.8

EV/EBITDA (x) 5.8 4.6 6.3 5.4

Div yield (%) 3.3 3.8 4.3 4.8ROE (%) 18.0 19.2 12.4 13.7

Net gearing (%) Net cash Net cash Net cash Net cash


Shares Outstanding (million) 755.1

Market Cap (RMmil) 3,171.4Book value (RM/share) 2.73

P/BV (x) 1.5

ROE (%) 18.0Net Gearing (%) Net cash

Major Shareholders Genting Bhd (55%)Free Float (%) 45



Absolute (%) -17.3 -44.4 -57.5Relative (%) +6.9 -26.1 -25.0

Company Report

PP12247/6/2009/(021181)

PLANTATION

(ASP MK, ASIA.KL)


Just as efficient as IOI

BUY(Initiate coverage)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009Asiatic Development




Income Statement (RMmil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Revenue 576.6 906.4 1,068.2 776.0 928.7EBITDA 189.2 412.4 495.8 331.1 397.1Depreciation 18.9 23.8 31.6 40.0 48.4Operating income (EBIT) 208.1 436.3 527.4 371.1 445.5Other income & associates 3.1 2.6 6.0 6.4 6.9Net interest 7.4 12.2 12.3 12.4 12.6Exceptional items 1.8 0.0 0.0 0.0 0.0Pretax profit 220.4 451.2 545.7 390.0 464.9Taxation (47.2) (103.1) (114.6) (81.9) (97.6)Minorities/pref dividends (2.1) (4.0) (4.4) (4.8) (5.3)Net profit 171.1 344.1 426.7 303.3 362.0Core net profit 169.4 344.0 426.7 303.3 362.0

Balance Sheet (RMmil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Fixed assets 367.6 384.2 444.7 539.9 627.1Intangible assets 5.7 23.8 23.8 23.8 23.8Other long-term assets 982.5 1,008.0 1,114.1 1,239.6 1,388.2Total non-current assets 1,355.8 1,416.0 1,582.6 1,803.3 2,039.2Cash & equivalent 261.4 495.1 600.2 580.5 528.8Stock 114.9 119.5 146.3 106.3 127.2Debtors 84.0 114.7 140.5 102.1 122.1Other current assets 118.6 135.6 145.9 158.1 171.6Total current assets 578.9 864.9 1,032.9 947.0 949.7Creditors 94.9 119.2 143.4 104.2 124.7Short-term borrowings - - - - -Other current liabilities 7.2 27.3 25.9 25.9 25.9Total current liabilities 102.1 146.5 169.3 130.1 150.6Long-term borrowings - - - - -Other long-term liabilities 63.9 58.5 60.0 61.8 63.7Total long-term liabilities 63.9 58.5 60.0 61.8 63.7Shareholders’ funds 1,757.4 2,064.3 2,370.2 2,537.6 2,748.5Minority interests 11.4 11.5 15.9 20.8 26.1BV/share (RM) 2.34 2.73 3.14 3.36 3.64

Cash Flow (RMmil, YE 31 Dec) 2006 2007 2008F 2009F 2010F

Pretax profit 220.4 451.2 545.7 390.0 464.9Depreciation 18.9 23.8 31.6 40.0 48.4Net change in working capital (59.3) (111.0) (153.2) (53.1) (129.7)Others (9.0) (13.3) (13.8) (14.3) (14.9)Cash flow from operations 171.1 350.7 410.3 362.6 368.7Capital expenditure (20.9) (44.6) (135.0) (150.0) (150.0)Net investments & sale of fixed assets (32.5) 0.7 1.0 1.0 1.0Others (6.7) (35.3) (88.2) (107.5) (130.5)Cash flow from investing (60.1) (79.3) (222.2) (256.5) (279.5)Debt raised/(repaid) 0.0 0.0 0.0 0.0 0.0Equity raised/(repaid) 7.1 7.3 0.0 0.0 0.0Dividends paid (36.4) (45.1) (83.0) (125.8) (140.9)Others 1.0 2.0 3.0 4.0 5.0Cash flow from financing (28.3) (35.7) (80.0) (121.8) (135.9)Net cash flow 82.8 235.7 108.1 (15.7) (46.7)Net cash/(debt) b/f 179.6 261.4 495.1 600.2 580.5Forex 0.0 0.0 0.0 0.0 0.0Net cash/(debt) c/f 262.4 497.1 603.2 584.5 533.8


Revenue growth (%) 10.3 57.2 17.8 -27.3 19.7EBITDA growth (%) 15.3 118.0 20.2 -33.2 19.9Pretax margins (%) 38.2 49.8 51.1 50.3 50.1Net profit margins (%) 29.7 38.0 40.0 39.1 39.0Interest cover (x) na na na na naEffective tax rate (%) 21.4 22.9 21.0 21.0 21.0Net dividend payout (%) 22.3 22.7 28.3 44.8 41.7Debtors turnover (days) 53 46 48 48 48Stock turnover (days) 73 48 50 50 50Creditors turnover (days) 60 48 49 49 49

KULIM


lllll We are upgrading Kulim (M) Bhd (Kulim) to a BUY withhigher RNAV-based fair value of RM6.05/share. Kulim isexpected to benefit from an uptick in CPO (crude palm oil)prices due to its recent expansion in Papua New Guinea.

lllll Kulim’s subsidiary in PNG, New Britain Palm Oil Ltd re-cently concluded its Kina147mil (US$53mil) take-over ofanother listed plantation company in PNG i.e. Ramu Agri-Industries Ltd. As a result, Kulim’s mature areas in PNG isexpected to increase by almost two-fold to 71,000 ha inFY09F.

lllll Currently, Kulim has only sold forward 15,000 tonne or11% of its FY09F’s production in Malaysia at an averageCPO price of RM2,100/tonne. Other than this, Kulim hasbeen selling mainly at spot prices. Kulim’s hedging policyallows the group to sell six months forward maximum. OurCPO price assumption for FY09F is about RM2,000/tonneand RM2,300/tonne for FY10F.

lllll We also understand that Kulim would not be reducing itsfertiliser application to avoid long-term effects on its crops.The group plans to buy fertiliser at spot prices in 1HFY09by keeping abreast of developments in fertiliser prices.

lllll Kulim’s operating costs (Malaysia division) is currentlyRM1,200/tonne, which is marginally higher than IOICorporation’s and Kuala Lumpur Kepong’s RM1,100/tonne.We understand that operating costs in PNG is slightly be-low Malaysia division’s RM1,200/tonne because of higheroil extraction rate (OER). We forecast OER of the PNG di-vision at 22% for FY09F compared to the Malaysiadivision’s 19%.

lllll For Kulim’s quick service restaurant division, we have con-servatively forecast turnover to improve 10% in FY09F.There is an upside potential to our earnings estimates asQSR Brands Bhd can now consolidate KFC Holdings’ earn-ings as its shareholding in KFC has increased to 50%.

lllll Kulim’s capex guidance for FY09F is RM300mil, out ofwhich 80% would go towards plantation development inPNG. But to be conservative again, we have forecast capexof RM350mil for FY09F.

lllll Foreign shareholding stood at 21% as of October 2008compared to 29% as of June 2008.

Price RM5.05

Fair Value RM6.05


Key Changes

Target price Ý

EPS Ý


Revenue (RMmil) 2,741.5 3,324.8 3,575.2 4,057.5Net Profit (RMmil) 426.8 324.1 291.4 333.0EPS (sen) 143.7 109.1 98.1 112.1FD EPS (sen) 135.3 102.9 92.5 105.7EPS growth (%) 226.4 (24.0) (10.0) 14.2Consensus Net Profit (RMmil) 323.0 241.7 385.0DPS (sen) 7.5 10.0 8.0 9.0PE (x) 3.5 4.6 5.1 4.5FD PE (x) 3.7 4.9 5.5 4.8EV/EBITDA (x) 1.8 1.2 1.5 1.5Div yield (%) 1.5 2.0 1.6 1.8ROE (%) 15.9 10.5 8.7 9.1Net Gearing (%) 18.1 15.6 11.8 7.7



Market Cap (RMmil) 1,500.4Book value (RM/share) 9.85

P/BV (x) 0.5

ROE (%) 15.9Net Gearing (%) 18.1

Major Shareholders Johor Corporation (52%)Free Float (%) 48



Absolute (%) -2.9 -37.3 -46.8Relative (%) +2.4 -22.2 -13.7

Company Report

PP12247/6/2009/(021181)

PLANTATION

(KUL MK, KULM.KL)


Benefits from expansion in PNG

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009Kulim





Revenue 1,836.5 2,741.5 3,324.8 3,575.2 4,057.5EBITDA 349.1 540.5 823.5 730.3 828.7Depreciation (91.4) (121.4) (141.1) (156.9) (172.6)Operating income (EBIT) 257.7 419.1 682.4 573.5 656.1Other income & associates 22.9 43.1 47.4 52.1 57.4Net interest (59.5) (62.7) (58.8) (55.5) (52.7)Exceptional items 0.4 159.4 0.0 0.0 0.0Pretax profit 221.6 558.8 671.0 570.1 660.8Taxation (51.6) (126.0) (208.0) (159.6) (185.0)Minorities/pref dividends (42.3) (88.3) (138.9) (119.0) (142.7)Net profit 127.6 344.6 324.1 291.4 333.0Core net profit 127.2 185.2 324.1 291.4 333.0


Fixed assets 2,815.1 2,756.2 2,965.1 3,158.3 3,335.7Intangible assets 285.3 288.2 288.2 288.2 288.2Other long-term assets 858.5 906.2 999.3 1,061.5 1,128.8Total non-current assets 3,958.8 3,950.6 4,252.6 4,507.9 4,752.7Cash & equivalent 146.7 760.5 791.9 817.9 878.8Stock 172.9 199.2 273.3 293.9 333.5Debtors 316.1 615.5 728.7 783.6 889.3Other current assets 55.8 19.5 19.5 19.5 19.5Total current assets 691.5 1,594.7 1,813.4 1,914.9 2,121.1Creditors 243.8 288.8 364.4 391.8 444.7Short-term borrowings 389.1 624.6 562.2 506.0 455.4Other current liabilities 2.6 25.1 25.1 25.1 25.1Total current liabilities 635.5 938.5 951.6 922.8 925.1Long-term borrowings 932.4 666.5 733.2 725.9 718.6Other long-term liabilities 275.9 255.6 255.6 255.6 255.6Total long-term liabilities 1,208.3 922.2 988.8 981.5 974.3Shareholders’ funds 2,433.5 2,927.0 3,229.1 3,503.0 3,816.2Minority interests 373.0 757.5 896.4 1,015.5 1,158.2BV/share (RM) 8.82 9.85 10.87 11.79 12.85


Pretax profit 221.6 558.8 671.0 570.1 660.8Depreciation 91.4 121.4 141.1 156.9 172.6Net change in working capital (175.4) (12.4) (319.8) (207.7) (277.5)Others 3.1 (196.7) (47.4) (52.1) (57.4)Cash flow from operations 140.7 471.1 445.0 467.1 498.5Capital expenditure (348.4) (321.9) (350.0) (350.0) (350.0)Net investments & sale of fixed assets 22.6 (103.8) (10.0) (10.0) (10.0)Others 116.9 505.5 0.0 0.0 0.0Cash flow from investing (209.0) 79.8 (360.0) (360.0) (360.0)Debt raised/(repaid) 14.8 (18.5) 4.2 (63.5) (57.9)Equity raised/(repaid) 27.7 50.7 0.0 0.0 0.0Dividends paid (32.1) (38.8) (22.0) (17.6) (19.8)Others (21.3) (19.9) 0.0 0.0 0.0Cash flow from financing (10.9) (26.5) (17.8) (81.1) (77.6)Net cash flow (79.3) 524.4 67.2 26.0 60.9Net cash/(debt) b/f 168.1 88.6 612.6 679.7 705.7Forex (0.2) (0.4) 0.0 0.0 0.0Net cash/(debt) c/f 88.6 612.6 679.7 705.7 766.6


Revenue growth (%) 38.1 49.3 21.3 7.5 13.5EBITDA growth (%) 43.1 54.8 52.4 -11.3 13.5Pretax margins (%) 12.1 20.4 20.2 15.9 16.3Net profit margins (%) 7.0 15.6 9.7 8.2 8.2Interest cover (x) 5.9 8.6 14.0 13.2 15.7Effective tax rate (%) 23.3 31.7 31.0 28.0 28.0Net dividend payout (%) 15.3 3.6 6.8 6.0 5.9Debtors turnover (days) 63 82 80 80 80Stock turnover (days) 34 27 30 30 30Creditors turnover (days) 48 38 40 40 40

IJM PLANTATIONS


lllll We initiate coverage on IJM Plantations (IJM Plant) with aBUY recommendation and fair value of RM2.80/share,which is based on a FY10F’s PE of 15x. We like IJM Plantfor its pure exposure to CPO (crude palm oil) price, attrac-tive age profile of trees and decently managed plantations.We estimate that for every RM100/tonne increase in CPOprice, IJM Plant’s FY10F net profit would improve by 5%.

lllll IJM Plant currently has approximately 63,000 ha oflandbank, out of which about 33,000 ha are located in In-donesia. Out of the group’s landbank of 63,000 ha, only anestimated 43% are planted. We view this positively as thismeans that there is no urgency for IJM Plant to aggres-sively expand its landbank in the future.

lllll One of IJM Plant’s plus points is that its landbank in Ma-laysia are entirely located in Sabah where the land is morefertile. As such, we forecast the group’s FFB (fresh fruitbunches) yield at 23 tonne/ha for FY10F. Currently, about62% of IJM Plant’s oil palm trees are between eight to 20years while 28% are between four to seven years old.

lllll IJM Plant is expanding its operations in India. Last year,the group entered into a joint venture with Godrej AgrovetLtd and Godrej Gokarna Oil Palm Ltd to carry out the busi-ness of palm oil milling in India. Before the palm oil mill isbuilt, IJM Plant together with its joint venture partners aretrying to source for FFB first by establishing third partysupplies and building nurseries.

lllll IJM Plant’s dividend yield is expected to be decent. Weforecast a gross DPS of 12 sen for FY10F, which implies apayout of 64%. Although this is higher than the payout of44% for FY07 - FY08, we believe that the group should beable to fund the increase in dividends due to its operatingcashflows estimated at RM150mil to RM200mil for FY10Fand FY11F.

lllll Our assumptions for FY10F include an average CPO priceof RM2,000/tonne, FFB yield of 23 tonne/ha and oil extrac-tion rate of 21%. We forecast net profit to decline 23% inFY10F before climbing up by 16% in FY11F on the back ofhigher CPO price assumption of RM2,300/tonne.

Price RM2.05

Fair Value RM2.80


Key Changes

Target price Initiate coverage

EPS Initiate coverage

YE to Mar FY08 FY09F FY10F FY11F

Revenue (RMmil) 478.0 497.1 372.3 431.5Net Profit (RMmil) 142.1 155.3 119.4 138.4EPS (sen) 22.3 24.3 18.7 21.7EPS growth (%) 194.4 9.3 (23.1) 15.9Consensus net profit (RMmil) 150.6 104.0 131.0DPS (sen) 12.0 11.0 12.0 13.0PE (x) 9.2 8.4 11.0 9.5EV/EBITDA (x) 6.0 5.6 7.2 6.3Div yield (%) 5.9 2.9 3.3 3.7ROE (%) 0.2 19.2 12.4 13.7Net gearing (%) Net cash Net cash 3.5 6.1


Shares Outstanding (million) 638.6Market Cap (RMmil) 1,309.1

Book value (RM/share) 1.22

P/BV (x) 1.7ROE (%) 24.0

Net Gearing (%) Net cash

Major Shareholders IJM Corporation Bhd (54.3%)

EPF (6.3%)

Free Float (%) 45.7Avg Daily Value (RMmil) 0.8


Absolute (%) +22.0 -39.7 -43.4

Relative (%) +28.6 -25.2 -8.1

Company Report

PP12247/6/2009/(021181)

PLANTATION

(IJMP MK, IJMP.KL)


Exposure to Sabah’s sterling FFB yields

BUY(Initiate coverage)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009IJM Plantations




Income Statement (RMmil, YE 31 Mar) 2007 2008 2009F 2010F 2011F

Revenue 271.6 478.0 497.1 372.3 431.5EBITDA 41.9 166.3 177.4 125.3 146.3Depreciation 20.7 21.8 22.2 27.6 32.7Operating income (EBIT) 62.6 188.1 199.6 152.9 179.0Other income & associates 2.4 5.7 6.0 6.3 6.6Net interest (8.6) (3.9) (1.2) (2.2) (3.5)Exceptional items 0.0 0.0 0.0 0.0 0.0Pretax profit 56.4 190.0 204.4 157.1 182.1Taxation (12.5) (47.8) (49.0) (37.7) (43.7)Minorities/pref dividends 0.0 (0.0) (0.0) (0.0) (0.0)Net profit 44.0 142.1 155.3 119.4 138.4Core net profit 44.0 142.1 155.3 119.4 138.4

Balance Sheet (RMmil, YE 31 Mar) 2007 2008F 2009F 2010F 2011F

Fixed assets 197.0 216.5 258.0 324.9 366.2Intangible assets 4.0 3.2 3.2 3.2 3.2Other long-term assets 548.6 583.0 627.9 677.1 731.1Total non-current assets 749.5 802.6 889.0 1,005.2 1,100.5Cash & equivalent 53.8 99.4 98.7 38.5 13.6Stock 19.4 40.4 40.9 30.6 35.5Debtors 25.2 55.5 54.5 40.8 47.3Other current assets 3.7 1.6 1.6 1.6 1.6Total current assets 102.1 196.9 195.7 111.5 97.9Creditors 23.3 42.5 42.6 31.2 36.2Short-term borrowings 34.9 34.9 31.5 28.3 25.5Other current liabilities 0.8 3.1 3.1 3.1 3.1Total current liabilities 59.0 80.5 77.2 62.6 64.8Long-term borrowings 108.6 34.9 38.4 42.2 46.4Other long-term liabilities 81.2 107.8 107.8 107.8 107.8Total long-term liabilities 189.9 142.7 146.2 150.0 154.2Shareholders’ funds 602.3 776.3 861.4 904.1 959.4Minority interests 0.5 - - - -BV/share (RM) 1.10 1.22 1.35 1.42 1.50

Cash Flow (RMmil, YE 31 Mar) 2007 2008F 2009F 2010F 2011F

Receipts from customers 275.3 473.2 497.1 372.3 431.5Payments to suppliers and employees (189.4) (292.2) (274.4) (201.0) (233.0)Interest paid (8.9) (6.6) (7.0) (7.0) (7.0)Income tax paid/(refunded) (6.4) (14.4) (14.7) (11.3) (13.1)Cash flow from operations 70.7 160.1 201.0 152.9 178.4Capital expenditure (21.9) (40.3) (100.0) (100.0) (80.0)Net investments & sale of fixed assets (1.5) (9.0) 0.0 0.0 0.0Others (9.4) (6.6) (39.4) (43.6) (48.1)Cash flow from investing (32.8) (55.9) (139.4) (143.6) (128.1)Debt raised/(repaid) (25.0) (35.0) (0.0) 0.7 1.4Equity raised/(repaid) 14.3 10.2 0.0 0.0 0.0Dividends paid (13.0) (19.2) (62.3) (70.2) (76.6)Others (3.1) (14.5) 0.0 0.0 0.0Cash flow from financing (26.8) (58.6) (62.3) (69.6) (75.2)Net cash flow 11.1 45.6 (0.7) (60.2) (25.0)Net cash/(debt) b/f 42.7 53.8 99.4 98.7 38.5Forex 0.0 0.0 0.0 0.0 0.0Net cash/(debt) c/f 53.8 99.4 98.7 38.5 13.6

Key Ratios (YE 31 Mar) 2007 2008F 2009F 2010F 2011F

Revenue growth (%) 11.0 76.0 4.0 -25.1 15.9EBITDA growth (%) 7.9 296.5 6.7 -29.4 16.7Pretax margins (%) 21.3 20.8 39.7 41.1 42.2Net profit margins (%) 14.6 16.2 29.7 31.2 32.1Interest cover (x) 5.4 5.1 43.6 147.2 59.2Effective tax rate (%) 31.5 22.1 25.2 24.0 24.0Net dividend payout (%) 36.4 43.6 43.8 45.2 64.2Trade debtors turnover (days) 17 11 10 10 10Stock turnover (days) 35 26 31 30 30Trade creditors turnover (days) 22 28 32 30 30

SARAWAK OIL PALMS


lllll We have upgraded Sarawak Oil Palms (SOP) to a BUY. Ourfair value of RM2.65/share is based on a FY09F’s PE of15x. We have also revised FY09F earnings upwards to ac-count for higher margins and CPO (crude palm oil) priceassumption of RM2,000/tonne versus RM1,800/tonne origi-nally. We estimate that for every RM100/tonne increase inCPO price, SOP’s earnings in FY09F would expand by 7%.

lllll Although FY09F’s net profit is expected to decline 42%YoY, we are recommending a BUY on SOP as we believethat CPO prices have bottomed. As CPO prices recover,SOP being a pure player like TH Plantations would ben-efit. We estimate SOP’s average selling price at RM2,800/tonne in FY08 compared to FY09F’s forecast of RM2,000/tonne. SOP sells its CPO mainly on spot prices.

lllll We expect SOP to continue with its landbanking exercise.Unlike other plantation companies, which would buy di-rectly into landbank, SOP’s method is via joint ventureswith Pelita Holding Sdn Bhd, which is one of SOP’s majorshareholders.

Pelita Holding is a subsidiary of the Land Custody andDevelopment Authority of Sarawak. Last year, SOP enteredinto a proposed joint venture with Pelita for the develop-ment of 14,500 ha of landbank in Sri Aman, Sarawak.

lllll SOP’s potential lies in its young oil palm trees, which placethe group in a good position in the long-term. We see po-tential for FFB yield enhancements in the future as moreof the young trees enter the prime age of seven to 15 yearsold. About 55% of SOP’s oil palm trees are between fourto 10 years old while 26% are less than three years old.

lllll About 60% of SOP’s total landbank are on peat soil whilethe balance 40% are on mineral soil. But we do not thinkthat this is a major concern as most of the infrastructurefor peat soil plantings such as water management systemare already in place. Hence, plantation development ex-penditure should not be substantial in the future.

Price RM2.13

Fair Value RM2.65


Key Changes

Target price Ý

EPS Ý


Revenue (RMmil) 439.5 619.8 474.8 604.6Net profit (RMmil) 109.3 131.3 76.5 100.9EPS (sen) 25.6 30.8 17.9 23.6FD EPS (sen) 24.9 30.1 17.6 23.2EPS growth (%) 214.2 20.1 (41.7) 32.0Consensus EPS na na na naDPS (sen) 2.3 3.0 3.0 4.0PE (x) 8.3 6.9 11.9 9.0FD PE (x) 8.6 7.1 12.1 9.2EV/EBITDA (x) 5.5 3.8 5.5 4.3Div yield (%) 1.1 1.4 1.4 1.9ROE (%) 27.2 22.9 10.5 12.6Net gearing (%) 29.4% Net cash 1.7% 0.8%



Market Cap (RMmil) 910.4


ROE (%) 27.2


Major Shareholders Shin Yang Plantation Sdn Bhd

(30%)Pelita Holding Sdn Bhd (26%)

Free Float (%) 70



Absolute (%) -14.1 -27.8 -30.3

Relative (%) -9.5 -10.5 +13.1

Company Report

PP12247/6/2009/(021181)

PLANTATION

(SOP MK, SOPS.KL)


Pure exposure to recovery in CPO price

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009Sarawak Oil Palms





Revenue 221.5 439.5 619.8 474.8 604.6EBITDA 71.5 188.0 229.3 166.2 211.6Depreciation (27.5) (32.0) (37.0) (42.2) (52.7)Operating income (EBIT) 44.0 156.0 192.4 124.0 158.9Other income & associates 0.0 0.0 0.0 0.0 0.0Net interest (8.1) (8.2) (9.6) (11.1) (13.0)Exceptional items 3.6 3.6 0.0 0.0 0.0Pretax profit 39.6 151.4 182.8 112.8 146.0Taxation (5.7) (34.2) (42.0) (26.0) (33.6)Minorities/pref dividends 1.0 (7.9) (9.5) (10.4) (11.5)Net profit 34.8 109.3 131.3 76.5 100.9Core net profit 31.1 105.7 131.3 76.5 100.9


Fixed assets 453.1 537.1 650.2 758.0 855.2Intangible assets 5.3 1.5 1.4 1.2 1.1Other long-term assets 135.5 186.5 180.4 169.1 167.0Total non-current assets 593.9 725.1 832.0 928.3 1,023.4Cash & equivalent 54.1 91.9 287.1 253.0 281.2Stock 14.1 29.0 24.8 19.0 24.2Trade debtors 9.1 14.4 20.7 15.8 20.2Other current assets 12.8 41.9 37.7 32.3 40.1Total current assets 90.1 177.2 370.2 320.1 365.6Trade creditors 21.1 21.4 84.9 65.0 82.8Short-term borrowings 65.4 70.3 73.8 77.5 81.4Other current liabilities 31.1 70.1 51.6 39.6 50.2Total current liabilities 117.6 161.8 210.3 182.2 214.5Long-term borrowings 150.5 155.4 170.9 188.0 206.8Other long-term liabilities 37.0 61.5 50.1 30.1 20.1Total long-term liabilities 187.5 216.9 221.0 218.1 226.9Shareholders’ funds 347.4 455.0 692.8 759.6 847.8Minority interests 31.6 68.6 78.1 88.5 100.0BV/share (RM) 1.22 1.58 1.81 1.99 2.22


Pretax profit 39.6 151.4 182.8 112.8 146.0Depreciation 27.5 32.0 37.0 42.2 52.7Net change in working capital (30.0) (36.6) 13.2 (38.7) (16.5)Others 4.4 (0.8) 5.0 5.0 5.0Cash flow from operations 41.4 146.0 238.0 121.3 187.2Capital expenditure (80.1) (101.8) (150.0) (150.0) (150.0)Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0Others (5.9) 0.8 3.4 3.5 3.5Cash flow from investing (86.0) (101.1) (146.6) (146.5) (146.5)Debt raised/(repaid) 5.8 5.1 19.1 20.8 22.7Equity raised/(repaid) 44.1 2.9 112.3 0.0 0.0Dividends paid (2.6) (5.2) (9.5) (9.6) (12.8)Others (11.1) (9.9) (18.1) (20.1) (22.4)Cash flow from financing 36.2 (7.1) 103.7 (8.9) (12.5)Net cash flow (8.4) 37.8 195.1 (34.1) 28.2Net cash/(debt) b/f 62.5 54.1 92.0 287.1 253.0Forex 0.0 0.0 0.0 0.0 0.0Net cash/(debt) c/f 54.1 92.0 287.1 253.0 281.2


Revenue growth (%) 19.7 98.4 41.0 -23.4 27.3EBITDA growth (%) 16.9 162.9 22.0 -27.5 27.3Pretax margins (%) 17.9 34.4 29.5 23.8 24.1Net profit margins (%) 15.7 24.9 21.2 16.1 16.7Interest cover (x) 8.8 22.9 24.0 14.9 16.3Effective tax rate (%) 14.5 22.6 23.0 23.0 23.0Net dividend payout (%) 14.9 5.9 7.2 12.6 12.7Trade debtors turnover (days) 15 12 30 30 30Stock turnover (days) 23 24 25 25 25Trade creditors turnover (days) 35 68 50 50 50

TH PLANTATIONS


lllll We have upgraded TH Plantations (TH Plant) to a BUY asbeing a pure plantation player, the group is expected toenjoy greater upside potential compared to the bigger com-panies. Our fair value for TH Plant is RM1.80/share basedon FY09F PE of 12x. We estimate that for every RM100/tonne increase in CPO price, TH Plant’s FY09F net profitwould rise by 5%.

lllll Due to the recovery in CPO prices, TH Plant is expected tobenefit from its RM199mil acquisition of companies, whichown 9,667 ha of brownfield landbank in Sabah. TH Plant’smature areas in FY09F is envisaged to increase by 68%mainly on the back of the acquisitions. As a result, THPlant’s sales in FY09F are forecast to expand by 13% inFY09F.

lllll The acquisitions would not only give TH Plant exposureto Sabah but also smoothen out the age profile of its oilpalm trees. Currently, more than 59% of TH Plant’s treesare more than 12 years old. With the acquisitions, TH Plantwould have greater proportion of young trees below 10years of age.

lllll The next phase of asset injection from parent company,Lembaga Tabung Haji would be in respect of the 72,243 haof landbank in Riau, Indonesia.

lllll But this would take some time as the oil palm trees in In-donesia are still young i.e. approximately 97% of the treesare between four to nine years old. Throughout the pastfew years, TH Plant has delivered on its words to acquirelandbank in Terengganu, Sarawak and recently Sabah.

lllll TH Plant’s plus point also comes in the form of its 50%dividend payout. We believe that TH Plant would still beable to maintain its dividend policy even though its sharebase has increased from 196.1 million to 487.6 million. Theincrease in TH Plant’s share base is due to new sharesissued for the abovesaid acquisition of companies.

lllll We forecast a gross DPS of 10 sen for FY09F, which im-plies a payout of 53%. Although return on equity is ex-pected to decline in FY09F, it is still an efficient 16%.

Price RM1.41

Fair Value RM1.80


Key Changes

Target price Ý

EPS Ý


Revenue (RMmil) 175.6 232.6 263.0 307.1Net Profit (RMmil) 61.9 88.3 73.0 86.3EPS (sen) 14.1 18.1 15.0 17.7EPS growth (%) 73.5 28.8 -17.3 18.2Consensus net profit (RMmil) n.a n.a n.a n.aDPS (sen) 9.4 10.0 8.0 10.0PE (x) 10.0 7.8 9.4 8.0EV/EBITDA (x) 3.0 2.3 2.4 2.3Div yield (%) 6.7 7.1 5.7 7.1ROE (%) 34.5 27.5 16.0 17.5Net Gearing (%) Net cash 7.2 9.0 13.7


Shares Outstanding (million) 487.6Market Cap (RMmil) 687.5

Book value (RM/share) 1.03

P/BV (x) 1.4ROE (%) 34.5

Net Gearing (%) Net cash

Major Shareholders Lembaga Tabung Haji (60%)

Yayasan Pok and Kassim

(3%)Free Float (%) 40



Absolute (%) -4.7 -15.1 -22.1Relative (%) +0.4 +5.3 +26.4

Company Report

PP12247/6/2009/(021181)

PLANTATION

(THP MK, THPB.KL)


Benefits from Sabah landbank buy

BUY(Upgraded)

12 January 2009

Gan Huey Ling, CFA

[email protected]

603 2036 2305

12 January 2009TH Plantations




Income Statement (RMmil, YE 31 Dec)2006 2007 2008F 2009F 2010F

Revenue 120.7 175.6 232.6 263.0 307.1EBITDA 55.2 92.0 134.9 131.5 153.5Depreciation (8.1) (8.8) (12.1) (13.3) (15.6)Operating income (EBIT) 47.1 83.2 122.8 118.2 138.0Other income & associates 0.0 0.0 0.0 0.0 0.0Net interest 0.8 0.5 0.5 0.6 0.6Exceptional items 0.0 0.0 0.0 0.0 0.0Zakat 0.0 (1.2) (1.3) (1.4) (1.6)Pretax profit 48.0 82.5 122.1 117.4 137.0Taxation (12.3) (21.3) (31.7) (29.3) (34.3)Minorities/pref dividends 0.0 0.7 (2.0) (15.0) (16.5)Net profit 35.7 61.9 88.3 73.0 86.3Core net profit 35.7 61.9 88.3 73.0 86.3


Fixed assets 69.8 71.5 309.4 316.1 320.6Intangible assets 0.0 0.0 0.0 0.0 0.0Other long-term assets 44.6 155.2 191.0 242.4 317.5Total non-current assets 114.4 226.7 500.4 558.6 638.1Cash & equivalent 39.7 38.6 42.2 132.4 219.9Stock 3.3 13.2 14.5 15.9 17.5Debtors 45.8 53.6 59.0 64.9 71.4Other current assets 0.0 0.0 0.0 0.0 0.0Total current assets 88.8 105.4 115.6 213.2 308.8Creditors 24.5 50.3 55.4 60.9 67.0Short-term borrowings 0.0 21.2 23.8 25.0 40.0Other current liabilities 2.0 4.7 4.6 4.6 4.6Total current liabilities 26.4 76.2 83.8 90.5 111.6Long-term borrowings 0.0 13.8 50.0 150.0 250.0Other long-term liabilities 19.0 33.4 31.9 31.9 31.9Total long-term liabilities 19.0 47.2 81.9 181.9 281.9Shareholders’ funds 157.8 201.2 440.7 474.7 512.2Minority interests 0.0 7.6 9.6 24.6 41.1BV/share (RM) 0.80 1.03 0.57 0.61 0.66


Pretax profit 48.0 82.5 122.1 117.4 137.0Depreciation 8.1 8.8 12.1 13.3 15.6Net change in working capital (23.4) (10.6) (33.4) (31.1) (36.2)Others 4.1 (10.7) 0.0 0.0 0.0Cash flow from operations 36.8 70.0 100.7 99.5 116.3Capital expenditure (6.3) (9.5) (50.0) (20.0) (20.0)Net investments & sale of fixed assets 0.0 1.0 (4.6) (4.9) (5.1)Others (3.4) (65.8) (31.1) (46.6) (70.0)Cash flow from investing (9.7) (74.3) (85.7) (71.5) (95.1)Debt raised/(repaid) 0.0 21.2 38.8 101.2 115.0Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0Dividends paid (31.0) (17.8) (48.8) (39.0) (48.8)Others 0.0 0.0 0.0 0.0 0.0Cash flow from financing (31.0) 3.4 (9.9) 62.2 66.2Net cash flow (3.9) (0.9) 5.1 90.2 87.5Net cash/(debt) b/f 41.9 38.0 37.1 42.2 132.4Forex 0.0 0.0 0.0 0.0 0.0Net cash/(debt) c/f 38.0 37.1 42.2 132.4 219.9


Revenue growth (%) 7.6 45.0 31.7 13.1 16.7EBITDA growth (%) 7.2 66.6 46.6 -2.5 16.7Pretax margins (%) 35.8 42.5 47.7 40.6 40.6Net profit margins (%) 26.6 31.8 34.5 25.2 25.5Interest cover (x) na na na na naEffective tax rate (%) 25.7 25.9 26.0 25.0 25.0Net dividend payout (%) 30.6 49.4 55.2 53.4 56.5Debtors turnover (days) 138 111 93 90 85Stock turnover (days) 10 27 23 22 21Creditors turnover (days) 137 220 207 169 159

12 January 2009TH Plantations


The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommendedin this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offerto sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have aposition in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide servicesto any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained orderived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts areaccurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon assuch. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in thisreport constitute our judgement as of this date and are subject to change without notice.


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Documents

PLANTATION SECTOR - Indofood Agri Resources Ltdindofoodagri.listedcompany.com/misc/Plant090112Am.pdfPLANTATION SECTOR Fast start to a new cycle OVERWEIGHT (Upgraded) Rationale for