PP 7767/09/2010(025354)

11 May 2010
Malaysia Corporate Highlights =
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New s Upda te
11 May 2010
MARKET DATELINE

Kuala Lumpur Kepong Share Price

Fair Value
:
:
RM16.50
RM18.40
Buys German Oleochemical Producer Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (KLK; Code: 2445) Bloomberg: KLK MK

Net Net
FYE Turnover Profit ^ EPS ^ Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Sep (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 6,658.3 753.8 70.6 (33.5) 23.4 - 3.1 17.5 10.9 8.1 2.4
2010f 7,687.6 934.5 87.5 24.0 18.8 90.0 3.0 15.1 15.1 8.1 2.7
2011f 8,910.5 1,315.9 123.3 40.8 13.4 102.0 2.7 12.6 19.7 7.3 3.9
2012f 8,967.4 1,378.3 129.1 4.7 12.8 114.0 2.7 11.2 20.6 5.5 4.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC/ FBM KLCI Component Stock (2.9% wt)
^ normalised

♦ Buys German oleochemical producer for €60.5m. KLK has entered

into a conditional S&P agreement with Croda International Plc to acquire Issued Capital (m shares) 1,067.5
oleochemicals manufacturer, Uniqema GMBH & Co KG (UG) and its Market Cap(RMm) 17,613.8
Daily Trading Vol (m shs) 1.6
150,000 tonne oleochemical plant at Emmerich, Germany, for a cash
52wk Price Range (RM) 10.90-17.26
consideration of €60.5m (or RM252.5m).
♦ Price tag seems fair. Excluding the working capital included of €25.4m
Major Shareholders:
Batu Kawan Bhd
(%)
46.6
(RM106m), the price tag is reduced to €35.1m (RM147m), which
EPF 7.6
translates to RM977/tonne, based on its production capacity. Although
this seems expensive compared to the RM677/tonne paid for Uniqema
Malaysia back in 2007, we believe the price is fair, as this is a plant in FYE Sep FY10 FY11 FY12
Europe in a prime location along the Rhine river and given that the plant EPS chg (%) - - -
has its own jetty and ample warehousing facilities. We also understand Var to Cons (%) (2.7) 20.8 13.3
the plant only occupies about 40% of the total landbank included in the
PE Band Chart
acquisition, thus giving KLK plenty of room to expand if so required.
♦ Initial impact on earnings minimal. KLK should not have any
PER = 25x
problems financing the acquisition, given its gross cash of RM1.56bn and PER = 20x
low net gearing level of 2.8%. Based on KLK’s immediate cash outlay PER = 15x
PER = 10x
required for the working capital, taking into account the interest income
foregone and assuming the worst case scenario where UG maintains its
operational losses at €2.1m (RM8.8m), the immediate impact to KLK’s
profits would be -0.8-1% for FY11. This is insignificant and we fully
expect management to be able to make good this acquisition within the
next year or so. Assuming KLK manages to bring operating margins up to Relative Performance To FBM KLCI
par with its existing oleochemical operations of 3.5% (as at 1QFY09/10),
this could potentially result in an operating profit of €2.8m, or about
KL Kepong
RM12m, based on FY09 revenue of €80m, which would in turn boost
KLK’s profits by an estimated 0.8-1% p.a..
♦ Risks. Main risks include: (1) a convincing reversal in crude oil price
trend resulting in reversal of CPO and other vegetable oils price trend; (2) FBM KLCI

weather abnormalities resulting in an over or under supply of vegetable

oils; (3) revision in global biofuel mandates and trans-fat policies; and (4)
a slower-than-expected global economic recovery, resulting in lower-
than-expected demand for vegetable oils.
♦ Investment case. No change to our forecasts, as the impact is too
minimal. We maintain our SOP-based fair value for KLK of RM18.40 and
our Outperform rating. We continue to like KLK for its inexpensive
valuations (as it remains the cheapest amongst the big-cap plantation
stocks currently) and for its strong management with a good track record.
Hoe Lee Leng
Further catalysts could come from better-than-expected FFB production
(603) 92802184
growth as well as potential return to profitability of the retail division. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 May 2010

♦ Buys German oleochemical producer for €60.5m. KLK has entered into a conditional S&P agreement with
Croda GmbH and Novarom GmbH, Croda Chemicals International Limited and Croda International Plc the acquire
the entire partnership interests of Uniqema GMBH & Co KG (UG) and certain business assets used in or for the
business carried out by UG at its oleochemical site at Emmerich, Germany, for a cash consideration of €60.5m (or
RM252.5m). UG is a manufacturer of basic oleochemicals (fatty acids and glycerine) and its Emmerich plant has
a production capacity of approximately 150,000 metric tonnes p.a.. The products manufactured by UG are used
by a wide variety of industries as intermediates for the manufacture of food additives, detergents, fabric
softeners, cosmetics, lubricants, plastic additives, etc.. UG’s production site is located strategically along the
Rhine at Emmerich, close to key customers and raw material supply routes. The site has ample storage tanks and
warehousing facilities, its own jetty and is well served by road and rail links.

♦ Conditions of acquisition. The acquisition is conditional on the approval of the German Federal Cartel Office
and the approval of Bank Negara Malaysia and is expected to be completed by end-FY09/10. KLK expects to fund
this acquisition with its existing cash reserves and bank borrowings. The consideration is based on an enterprise
value on a debt free cash free basis and is subject to adjustments following the completion if:

(i) the working capital calculation differs from €25.4m;

(ii) there is cash, borrowings (inclusive of net shareholder advances), or current taxation liabilities not normally
included within working capital; and

(iii) the gross pension liabilities (comprising unfunded pension schemes) estimated at €35.2m, which is fully
deductible from the price, changes.

♦ Why sell? Croda International Plc is listed on the London Stock Exchange and is a leading specialty chemical
company catering to the consumer care and industrial specialties sectors. The disposal of its German operations is
the final phase of Croda’s restructuring programme to re-position its oleochemical operations. We note that Croda
has been disposing off its Uniqema plants gradually, and also sold its 100,000 tonne-capacity plant in Malaysia to
KLK in 2007 for RM67.7m.

♦ Is price fair? While KLK’s acquisition price of €60.5m (or RM253m) may seem like a high price to pay for a
150,000 tonne capacity plant, compared to its Malaysian-counterpart acquisition, we believe this is misleading,
given that included in the price tag of €60.5m is working capital of €25.4m (RM106m). Excluding the working
capital, the price tag is reduced to €35.1m (RM147m), which translates to RM977/tonne, based on its production
capacity. Although this seems expensive compared to the RM677/tonne paid for Uniqema Malaysia back in 2007,
we believe the price is fair, as this is a plant in Europe in a prime location along the Rhine river and given that the
plant has its own jetty and ample warehousing facilities. We also understand the plant only occupies about 40%
of the total landbank included in the acquisition, thus giving KLK plenty of room to expand if so required.

Chart 1. KLK’s Acquisition Price

Enterprise Value Euro 60.5

Less: Working capital Euro -25.4
Euro 35.1

Malaysian RM equivalent (@ exchange rate RM4.142/Euro) RM147m

Production capacity 150,000

RM/tonne 977

♦ Operations loss-making, but we believe KLK can turn it around. According to Croda Plc’s website, most of
the Emmerich plant’s products are sold to Croda’s Industrial Specialties market and on a pro-forma basis,
recorded sales of €80m and made an operating loss of €2.1m in 2009, with net operating assets of €37.7 million
at 31 December 2009. Despite the operational loss, we believe KLK would be able to improve its operations such
as to turn around the operations in the not-too-distant future, given its success in improving the Uniqema
operations in Malaysia. We understand that Uniqema’s operating profits improved threefold one year after KLK
took over, as KLK managed to reduce wastage and manage the operations more efficiently.

Page 2 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 May 2010

♦ KLK’s oleochemical manufacturing capacity would rise by 8.2% to 1.83m tonnes (after including the soon-
to-be-completed 100,000 tonne methyl ester sulfonate and 200,000 tonne methyl ester fractionation plant) in
FY11, once the acquisition is completed.

♦ Initial impact on earnings minimal. KLK should not have any problems financing the acquisition, given its
gross cash of RM1.56bn and low net gearing level of 2.8%. Based on KLK’s immediate cash outlay required of
€25.4m (RM106m) for the working capital, and taking into account the interest income foregone and assuming
the worst case scenario where UG maintains its operational losses at €2.1m (RM8.8m), the immediate impact to
KLK’s profits would be -0.8-1% for FY11. We believe this is insignificant, and fully expect management to be able
to make good this acquisition within the next year or so. Assuming KLK manages to bring operating margins up to
par with its existing oleochemical operations of 3.5% (as at 1QFY09/10), this could potentially result in an
operating profit of €2.8m, or about RM12m, based on FY09 revenue of €80m, which would in turn boost KLK’s
profits by an estimated 0.8-1% p.a..

Risks

♦ Main risks include: (1) a convincing reversal in crude oil price trend resulting in reversal of CPO and other
vegetable oils price trend; (2) weather abnormalities resulting in an over or under supply of vegetable oils; (3)
revision in global biofuel mandates and trans-fat policies; and (4) a slower-than-expected global economic
recovery, resulting in lower-than-expected demand for vegetable oils.

Forecasts

♦ Unchanged. No change to our forecasts, as the impact is too minimal.

Valuation and Recommendation

♦ Maintain Outperform. We maintain our SOP-based fair value for KLK of RM18.40 and our Outperform rating.
We continue to like KLK for its inexpensive valuations (as it remains the cheapest amongst the big-cap plantation
stocks currently) and for its strong management with a good track record. Further catalysts could come from
better-than-expected FFB production growth as well as potential return to profitability of the retail division.

Table 2. Fair Value Calculation

Valuation basis FV (RMm)

Plantation earnings 18x CY10 earnings 18,305.7

Manufacturing earnings 12.5x CY10 earnings 1,453.2

Property earnings 13.5x CY10 earnings 88.6

Retail earnings Zero asset value less potential asset write-downs (16.5)

Add/(less): Net cash/(debt) (End-1QFY10) (165.2)

SOP (RMm) 19,665.9

SOP/share (RM) 18.42

Shares (m) 1,067.5

Source: RHBRI estimates

Page 3 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 May 2010

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Sep (RMm) FY09a FY10F FY11F FY12F FYE Sep FY10F FY11F FY12F

Turnover 6,658.3 7,687.6 8,910.5 8,967.4 FFB Processed (‘000 t) 4,129 4,469 4,688
Turnover growth (%) (15.2) 15.5 15.9 0.6 CPO Production (‘000 t) 888 961 1,008
PKO Production (‘000 t) 202 219 230
Operating Profit 921.6 1,311.5 1,855.0 1,933.9 Average CPO price (RM/t) 2,500 2,650 2,500
Op Profit margin (%) 0.1 0.2 0.2 0.2 Average PKO price (RM/t) 2,700 3,300 3,000

EBITDA 1,210.0 1,557.5 2,108.5 2,211.3

EBITDA margin (%) 18.2 20.3 23.7 24.7

Depreciation (205.5) (229.5) (253.4) (277.4)

Net Interest (68.8) (65.8) (59.5) (51.7)
Associates 34.6 37.6 34.7 34.9
EI (82.9) (16.5) 0.0 0.0

Pretax Profit 887.4 1,283.3 1,830.2 1,917.1

Tax (244.8) (324.9) (457.6) (479.3)
PAT 642.6 958.3 1,372.7 1,437.8
Minorities (30.1) (40.3) (56.8) (59.5)
Net Profit 612.5 918.0 1,315.9 1,378.3
Core Net Profit 753.8 934.5 1,315.9 1,378.3
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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

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

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

Page 4 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com