SECTOR FOCUS OF THE DAY Plantation Sector : Rising inventory to underpin price weakness (CPO Price) NEUTRAL Downgrading sector from Overweight to Neutral. Our average CPO price assumptions are unchanged at RM2,400/tonne for 2016F and RM2,500/tonne for 2017F. We believe that CPO prices have peaked. Hence, the improvement in the profitability of plantation companies from 2Q2016 onwards may not significantly affect share prices. We reckon that CPO prices will come under pressure from rising inventory in Malaysia in 2H2016. Palm inventory in Malaysia is expected to increase again in 2H2016. After falling in 1H2016 on the back of El Nino, we reckon that CPO production in Malaysia would recover from 3Q2016 onwards due to seasonal factors. Although CPO production in Indonesia may be weak in 2H2016 due to lagged impact of the drought from July to November 2015, we think that the rise in palm oil inventory in Malaysia would be enough to alleviate any tightness in supply in Indonesia. In addition if China’s demand for palm oil softens in 2H2016, there is risk that palm oil inventory in Malaysia would reach or exceed 2.5mil tonnes. China’s demand for palm oil could ease in 2H2016. We think that China’s palm oil imports would ease in 2H2016 due to ample inventory and a slowdown in the oleochemical and specialty fats industries. On a positive note, we reckon that the usage of palm oil in the frying and cooking oil industries in China would remain resilient supported by population growth and urbanisation. Against a few of the other commodities, CPO has under-performed year-to-date. The rise in CPO prices in 1H2016 has been weaker than a few of the other commodities. Plantation companies under our coverage are currently trading at PE multiples of 24.6x to 51.4x for FY16F and 21.6x to 32.3x for FY17F. The large-cap plantation companies such as KLK and IOI are 5% to 10% cheaper than the medium-cap companies like Genting Plantations and IJM Plantations based on FY16F earnings. Plantation companies under our coverage are currently rated as either HOLDs or SELLs. For investors, who would like exposure to the sector, we recommend Kuala Lumpur Kepong (KLK) for its young oil palm trees in Indonesia and low net gearing of 28.6%. Average age of KLK’s oil palm trees in Indonesia is 10 years old. About 17.8% of KLK’s borrowings are denominated in USD. QUICK TAKES Tenaga Nasional : TNB begins pre-q for Lumut expansion BUY Plantation Sector : Newsflow for week of 13 to 17 June (Newsflow) NEUTRAL ECONOMIC HIGHLIGHTS US : Expect housing market to support for 2Q2016 GDP NEWS HIGHLIGHTS Technology Sector : HeiTech Padu eyes RM200mil revenue from public sector in 2016 UEM Sunrise : Set to meet 40pc of sales target in H1

SECTOR FOCUS OF THE DAY

Plantation Sector : Rising inventory to underpin price weakness (CPO Price)        NEUTRAL

Downgrading sector from Overweight to Neutral. Our average CPO price assumptions are unchanged at RM2,400/tonne for 2016F and RM2,500/tonne for 2017F. We believe that CPO prices have peaked. Hence, the improvement in the profitability of plantation companies from 2Q2016 onwards may not significantly affect share prices. We reckon that CPO prices will come under pressure from rising inventory in Malaysia in 2H2016. Palm inventory in Malaysia is expected to increase again in 2H2016. After falling in 1H2016 on the back of El Nino, we reckon that CPO production in Malaysia would recover from 3Q2016 onwards due to seasonal factors. Although CPO production in Indonesia may be weak in 2H2016 due to lagged impact of the drought from July to November 2015, we think that the rise in palm oil inventory in Malaysia would be enough to alleviate any tightness in supply in Indonesia. In addition if China’s demand for palm oil softens in 2H2016, there is risk that palm oil inventory in Malaysia would reach or exceed 2.5mil tonnes.

China’s demand for palm oil could ease in 2H2016. We think that China’s palm oil imports would ease in 2H2016 due to ample inventory and a slowdown in the oleochemical and specialty fats industries. On a positive note, we reckon that the usage of palm oil in the frying and cooking oil industries in China would remain resilient supported by population growth and urbanisation. Against a few of the other commodities, CPO has under-performed year-to-date. The rise in CPO prices in 1H2016 has been weaker than a few of the other commodities. Plantation companies under our coverage are currently trading at PE multiples of 24.6x to 51.4x for FY16F and 21.6x to 32.3x for FY17F. The large-cap plantation companies such as KLK and IOI are 5% to 10% cheaper than the medium-cap companies like Genting Plantations and IJM Plantations based on FY16F earnings.  Plantation companies under our coverage are currently rated as either HOLDs or SELLs. For investors, who would like exposure to the sector, we recommend Kuala Lumpur Kepong (KLK) for its young oil palm trees in Indonesia and low net gearing of 28.6%. Average age of KLK’s oil palm trees in Indonesia is 10 years old. About 17.8% of KLK’s borrowings are denominated in USD.

QUICK TAKES

Tenaga Nasional : TNB begins pre-q for Lumut expansion              BUY

Plantation Sector : Newsflow for week of 13 to 17 June (Newsflow)        NEUTRAL            

ECONOMIC HIGHLIGHTS

US : Expect housing market to support for 2Q2016 GDP

NEWS HIGHLIGHTS

Technology Sector : HeiTech Padu eyes RM200mil revenue from public sector in 2016

UEM Sunrise : Set to meet 40pc of sales target in H1