􀂄 Summary

We expect palm oil supply from Malaysian and Indonesia to slow significantly in

the next few years because of a lack of land, ageing estates, a labour shortage, a

more cautious approach to expansion, and difficulty obtaining cultivation permits.

Further, Oil World and USDA forecast a weak crop of South American soybeans

in 2011. Therefore, we remain bullish on crude palm oil (CPO) prices in 2011.

􀂄 Implications of “The Return of the Political Economy”

We expect rising pressure on plantation companies not to plant in virgin forests,

orangutan habitats and peat land from environmental non-governmental

organisations. We also think there will be increasing public calls to cease biodiesel

mandates as the price of edible oil escalates.

􀂄 Re-leveraging—The Imperative and Appetite to Pursue

With CPO prices likely to be high, plantation companies should have healthy cash

reserves in 2011. We believe they will have sufficient funds to continue planting,

although they might be more careful from an environmental aspect. We expect a

pick up in M&A activity to expand downstream manufacturing and distribution, as

companies will likely want to secure outlets for their upstream production.

􀂄 Most & Least Preferred Stock Ideas for 2011

We have Buy ratings on all of the plantation stocks under our coverage. Our most

preferred stocks are Indofood Agri Resources and Sime Darby, while our least

preferred are Golden Agri Resources and IOI Corporation.

 Investment case: We believe Indofood Agri has just completed a major capex

cycle, spending US$1bn in 2005-2009 constructing a palm oil refinery, a sugar

mill and refinery, planting up oil palm and sugarcane estates and acquiring

Lonsum. The company’s debt increased from Rp112bn in 2005 to Rp5.2trn in

2009. In the next few years we believe Indofood Agri is well positioned to

benefit, with rising cashflows, improving profitability, lower gearing and

potential for dividends.

Valuation: We base our price target for Indofood Agri on a sum-of-the-parts

valuation, where we assume a CPO price of US$982/tonne and WACC of 7.5%.

We value its cooking oil and commodities business on 12x 2011E earnings.

2011 catalysts: We think corporate results showing improving cashflow and

CPO price upside will be the key catalysts for the stock. We also expect the

sugar business to contribute positively to earnings in Q311.

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