Kuala Lumpur Kepong Bhd

Rising downside risk for CPO prices
8 August 2008
UNDERPERFORM Maintained
RM12.40 Target: RM11.60
Mkt.Cap: RM13,237m/US$4,032m

Dry spell..........................oil price of US$120 per barrel.
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Valuation and recommendation
Forecasts intact but target price cut. We are maintaining our earnings forecasts for KL Kepong but have chopped our target price by 29% from RM16.40 to RM11.60 after applying a lower target P/E of 12x (16x previously) to its plantation unit as well as a 10% discount to KLK’s SOP value. The reduction in the P/E multiple accorded to its plantation unit basically reflects our expectation of potential downside risk to our CPO price forecasts.

Maintain UNDERPERFORM call. There is no change to our UNDERPERFORM call on the stock. We continue to expect KL Kepong to de-rate against the market as the softening CPO price will dampen earnings prospects. The principal de-rating catalysts are the softening CPO price, declining crude oil price, potential U-turn in biodiesel policy and rising operating costs.