Regional Plantations , Clouds on the horizon, Macquarie

The fundamentals of Crude Palm Oil (CPO) held up relatively well through 4Q11

and 1Q12, as we had expected. However, an elevated macro risk environment

kept most investors away from plantation stocks for the better part of last year.

With these risks receding somewhat, we have finally seen equity prices catch up

with the fundamentals of the commodity. In the past three months, plantation

stocks have risen on average by 14% vs. a 2% rise in the commodity. From here

on, individual company prospects, rather than the commodity price, are likely to

drive differential stock performance in our view.

Our agri team has a bearish outlook on grains and oilseeds

Our agri-commodities team expects a strong supply response in 2012 for major

grains and oilseeds, on the back of favorable cash returns and a return to

“normal” weather which will help yields return to trend. For most commodities,

they expect prices to gradually ease over the course of the next two seasons –

falling sharpest from 2H12, straight after the northern hemisphere harvests.

We are more constructive on palm oil prospects for 2012

We see the palm oil balance sheet tightening in 2012, as we expect palm oil to

take incremental market share this year amid slower production growth. We

estimate the CPO stock-to-usage ratio to decline to 14.7% for 2011/12 from

16.6% in 2010/11. We therefore believe that palm oil will be the outperformer in

the grains and oilseeds complex in 2012. However, given our bearish view on

other grains and oilseeds and the risk of intensifying competition between

Malaysia and Indonesia, we believe that it would be difficult for CPO to rally

above RM3,200/t, especially in 2H12. We expect CPO prices to remain relatively

strong in 1H12 though, due to ongoing weather issues in South America and

potential for acreage shift in the US away from soybeans to corn in 2Q12.

No significant changes to our CPO price forecasts

Given the downgrade in our team‟s soybean forecasts, we have reduced our

CPO price assumption for 2012 in USD by 6% to US$1,020/t. However, our

economists now forecast a slower appreciation of the MYR relative to the USD,

which has raised our CPO price in MYR to RM3,130/t. We have also raised our

price assumption for 2013 by 5% in USD terms to US$1,027/t and by 6% in MYR

terms to RM2,900/t.

Stock specific catalysts to drive differential performance

With plantation stocks catching up with the commodity fundamentals in the past

three months and given our bearish view on most agri-commodities, we believe

stock-specific catalysts will shine through this year. We recommend Sime Darby

in Malaysia, London Sumatra in Indonesia and First Resources in Singapore

as our top plantation picks, as we believe that consensus upgrades in these

names will drive price performance, even assuming CPO prices don‟t rise above

current spot prices. Our estimates are, on average, 4% above consensus on

these names, with possible further upside risks.

We are downgrading our recommendations on our previous top picks, KL

Kepong and Golden Agri, to Neutral, as we believe these stocks now offer

limited upside to our price targets.