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SECTOR UPDATE

MARKET WEIGHT

Plantation – Malaysia

(Maintained)

Weak Production Growth To Continue Mixed set of results with plantation companies’ results being affected by low CPO prices and production growth. Plantation companies with higher exposure in Sabah reported better production growth while companies with larger exposure in Peninsular Malaysia reported lower production growth, affected by monsoon rain and flood. Although CPO price is expected to recover in 1H15, weak production growth could be a drag on plantation companies in 1H15. Maintain MARKET WEIGHT.

CPO PRICE RECOVERY

2,800 2,600 2,400

WHAT’S NEW

2,200

 4Q14 performance affected by lower CPO prices and production growth. Most plantation companies reported weaker net profit in 4Q14 mainly due to the seasonally weak production growth and lower CPO ASP during the quarter. However we noted that companies with more exposure in Sabah reported better production growth.

2,000

 Mixed set of results. Most plantation companies reported results within our expectation except for IOI Corporation (IOI), Sarawak Oil Palm (SOP) and Genting Plantations (GENP). GENP reported better-than-expected results mainly due to better-than-expected contribution from property division on gain from land sales while IOI’s results were dragged by unrealised fair value loss in forex forward exchange contract in downstream operation and higher-than-expected effective tax rate. On the other hand, SOP’s results were hit by losses of more than RM10m in 4Q14 for its refining business.  Recovery in CPO prices to continue into 1H15... CPO price has recovered by 11% since the low of RM2,126 beginning of the year, mainly supported by the increase in biodiesel subsidy in Indonesia and low CPO production. We are expecting CPO price to be better in 1H15 with the tight supply in the market. However, CPO price in 2H15 would depend on biodiesel demand from Malaysia and Indonesia. This is in line with market expectations with industry experts sharing the same view during the Palm & Lauric Oils Conference (POC) 2015.  …but production will be weak. The recovery in CPO prices is likely to be offset by the weak production in 1H15. We are expecting weak production growth for 1H15 mainly due to seasonal factor and lagged impact from dry weather in 2014. So far in 1Q15, we gather that FFB production is relatively weak and some companies are expecting a qoq contraction in production. Overall, Malaysia production in Jan 15 was down by 15.0% mom and 23.1% yoy and we are expecting Feb 15 production to be much lower due to fewer harvesting days. The recovery in 2Q115 is likely to be a weak one before we see a stronger recovery in production in 2H15. ACTION

CPO Price

(RM/tonne) 3,000

1,800 Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Source: Bloomberg

SHARE PRICE PERFORMANCE Share Price (lcl crcy)

yoy (%)

ytd (%)

3.78 10.24 9.32 22.66 4.66

13.9 (4.3) 0.9 (4.1) (1.5)

4.4 2.4 1.4 (0.6) (2.9)

1.92 3.25 1.04 0.715 0.195 0.415

(14.7) (6.9) 4.0 (21.4) (20.4) (29.7)

2.7 0.3 (0.5) (1.4) (2.5) (9.8)

26,300 1,910 2,055 364

(3.0) (11.0) 4.8 (67.9)

8.5 1.1 (2.1) (9.0)

Malaysia IJMP MK GENP MK SIME MK KLK MK IOI MK Singapore FR SP WIL SP BAL SP IFAR SP KAGR SP GGR SP Indonesia AALI IJ LSIP IJ SGRO IJ BWPT IJ Source: Bloomberg

ANALYSTS Regional Research Team +65 6535 6868 [email protected] Chan Yuan She +603 2147 1988 [email protected]

 Maintain MARKET WEIGHT. CPO price is likely to be better in 1H15 with the tight CPO supply. However, for 2H15, it would depend on biodiesel demand from Malaysia and Indonesia. We prefer Singapore- and Indonesia-listed plantation companies for their younger age profile and stronger production growth. PEER COMPARISON Company Sime Darby IOI Corporation Genting Plantations Sarawak Oil Palm Kuala Lumpur Kepong IJM Plantations Felda Global #

Ticker SIME MK IOI MK GENP MK SOP MK KLK MK IJMP MK FGV MK

Rec HOLD HOLD HOLD HOLD SELL SELL NR

Price @ 5 Mar 15 (RM) 9.32 4.66 10.24 5.56 22.66 3.78 2.20

Target Price (RM) 9.35 4.15 10.10 6.20 20.00 2.90 NA

Market Cap (US$m) 15,865 8,125 2,163 669 6,614 912 2,198

2014 (x) 18.0 23.6 20.4 17.6 24.4 28.8 26.2

------ PE -----2015F (x) 22.3 22.3 21.3 14.6 21.4 27.1 17.9

2016F (x) 17.5 17.8 17.7 14.6 19.9 23.8 15.7

ROE (%) 11.8 34.3 10.3 8.8 13.0 6.4 4.7

P/B (x) 2.0 4.8 2.0 1.8 3.1 2.2 1.3

Div (sen) 36.0 11.6 9.6 6.0 62.8 7.0 8.6

Div Yield (%) 3.9 2.5 0.9 1.1 2.8 1.8 3.9

# Based on consensus earnings. Source: UOB Kay Hian

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ESSENTIALS

RESULTS SUMMARY

 Weaker production growth in Peninsula Malaysia and Sarawak. Besides the seasonal factor, plantation companies with greater exposure in Peninsula Malaysia reported weaker FFB production growth, eg Kuala Lumpur Kepong (-5.8% qoq, -5.0% yoy) and Sime Darby (-13.1% qoq, -14.7% yoy). Their production growth is likely to be affected by the monsoon rains and flood at end-14. Sime Darby’s production was also affected by the delay in yield recovery for its Indonesian estates. SOP’s 4Q14 FFB production dropped by 18.5% qoq (-3.6% yoy) owing to the monsoon rain and the dry weather in 2013. On the other hand, IJMP’s production (-3.3% qoq, +12.3% yoy) was affected by the seasonal factor and dry weather in its Kalimantan estates.

Net Profit (RMm) 4Q14 Above expectation GENP 148 Within expectation SIME 416 KLK 214 IJMP 31 Below expectation IOI 94 SOP 9 Source: Respectively Companies

 Key highlights from POC 2015: a) Speakers are bearish on 2H15. During the conference, speakers are more optimistic about CPO prices in 1H15 due to the tight CPO supply situation as a lagged impact from dry weather in 2014. However, a gradual increase in CPO supply in 2H15 is likely to put more pressure on CPO price. We are expecting CPO price of RM2,525/tonne for 2015, which is above market expectation. However, if the demand stays weak in 2015, there is downside risk to our CPO price assumption. b) Inventory to hit bottom in 1H15 and rebound towards year end. Speakers are expecting lower inventory in 1H15 and much higher inventory in 2H15 during the peak production season. Mr James Fry expects inventory in Malaysia to decline to 1.6m tonnes in 2Q15 and may rebound to above 2.5m tonnes in 4Q15 unless discretionary palm methyl ester sales are viable with lower crude palm oil prices or there is a dramatic policy switch boosts local biodiesel sales. On the other hand, Mr Dorab Mistry mentioned that inventories in Malaysia will probably fall below 1.5m tonnes by Jun 15 while reserves in Indonesia will bottom at about 2.5m tonnes in July before rising to 4.65m tonnes by December. We believe that the pace of pick-up in inventory in 2H15 will be determined by the biodiesel consumption in Malaysia and Indonesia. c) Weak 1H15 production. Speakers expect weak production in 1H15 and a gradual increase in 2H15 during peak production season. However, they are only expecting a marginal increase in global production. Mr Mistry expects Malaysia CPO production to be at best 19.7m tonnes or might even fall short of 19.5m tonnes if the current dry weather continues (2014: 19.7m tonnes), while production in Indonesia will probably reach 31.5m tonnes from 30m tonnes. For 2015, We are expecting CPO production of 19.5m tonnes and 32.6m tonnes for Malaysia and Indonesia respectively due to the lagged impact from dry weather in 2014 SECTOR CATALYSTS  Palm oil shortage due to dryness. There could be an impact from the dry weather in Peninsular Malaysia in 1Q14 and in Kalimantan in late-3Q14.

qoq % chg

yoy % chg

>100

16.2

(6.5) 25.4 (0.5)

(49.1) 26.8 (36.7)

(55.8) (75.3)

(81.2) (75.0)

qoq % chg 9.9 3.7 (3.3) (5.8) (13.1) (18.5)

yoy % chg 1.7 (1.5) 12.3 (5.0) (14.7) (3.6)

FFB PRODUCTION IN 4Q14 ('000 tonnes) 4Q14 GENP 474 IOI 1,003 IJMP 237 KLK 955 SIME 2,194 SOP 259 Source: Respectively Companies

CPO PRICE FORECAST BY DIFFERENT SPEAKERS James Fry Thomas Mielke Dorab Mistry

CPO Price Forecast (RM/tonne) 1H15: 2,260 2H15: 1,770 2,815 (US$770) 2,500 by May 15 2,100 by Dec 15

Source: Respectively Speaker

CPO PRODUCTION FORECAST BY DIFFERENT SPEAKERS (tonnes) 2014 2015F Malaysia Mr Ling Ah Hong* 19.7 20.2 Mr Thomas Mielke 19.7 19.8 Mr Dorab Mistry 19.7 19.7 Indonesia Mr Ling Ah Hong 31.4 32.4 Mr Thomas Mielke 30.8 32.9 Mr Dorab Mistry 30.0 31.5 * Yet to factor in the impact from high rainfall in Dec 14-Jan 15. Source: Respectively Speaker

 Restocking in China. Palm oil inventories in China have fallen significantly, down 53% from the peak of 1.2m tonnes in Feb 14.  Acceleration of biodiesel blending in Indonesia and Malaysia. Indonesia is now the largest palm biodiesel consumer. If Indonesia puts in all efforts to meet its B10 requirement for transportation, there could be less palm oil available for the global market. ASSUMPTION CHANGES  We maintain our CPO price forecasts of RM2,525/tonne for 2015 and RM2,600/tonne for 2016. RISKS  Backtracking of biodiesel mandates in Indonesia and Malaysia after the recent fall in crude oil prices.

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