UBS INDO Asia Plantations Sector Fundamentals strong, but risk levels rising

􀂄 CPO price to break RM4,000/tonne in H1 2010
We raise our CPO price assumptions for: 1) 2011 31% to RM4,000/tonne (US$1,290/tonne); 2) 2012 20% to RM4,000/tonne (US$1,290/tonne); 3) 2013 20% to RM4,000/tonne (US$1,290/tonne); and 4) 2014 23% to RM3,504/tonne (US$1,130/tonne). We raise our 2011-14 EPS forecasts 4-24% and our price
targets 4-9%.

􀂄 Price stronger than expected due to investment funds flow
The CPO price has been stronger than we anticipated in November-December 2010 due to the deterioration in Argentinean soybean crop prospects as a result of La Nina, and a marked increase in investment fund flows into commodities in general. Commodities such as crude oil, sugar, rubber, soybeans, wheat and corn
have been testing two to three year highs.

􀂄 Positive demand-supply fundamentals but greater risk and price volatility
Although palm oil and soybean demand-supply fundamentals remain supportive of higher vegetable oil prices for the next two to three years, the increasing presence of investment funds in commodities means that macro factors are becoming more important than demand-supply factors specific to palm oil. As a result, price
volatility and overall risk levels have increased. In addition, we think high prices and the unusually good profit margin are likely to lead to higher regulatory risks.

􀂄 Prefer Malaysian stocks over Indonesian; top pick is Sime Darby
We prefer the Malaysian plantation stocks over the Indonesian stocks due to lower regulatory risk. Our top sector pick is Sime Darby, as we believe there is potential for restructuring. Our top pick for Indonesia is London Sumatra.