The Malaysian Government increased the levy for foreign workers,effective 1 Feb 2016. Plantation companies now have to pay an annual levyof MYR1,500 (+254% from previously) per worker. Although the impact isnot significant to overall profit (1-14%), we believe this move could signalthe Government’s willingness to raise taxes for the plantations sector infuture. No change to our Overweight call on the sector, with top picksGenting Plantations and Kuala Lumpur Kepong.

Foreign workers levy raised. The levy for foreign workers has been increased,in some cases, to double what the employers were previously paying. Effective1st Feb 2016, foreign workers in the plantation and agriculture sectors will haveto pay an annual levy of RM1,500 (from MYR590 for plantation and MYR410 foragriculture). Foreign workers in the manufacturing sector would have to pay an annual levy of MYR2,500 (from MYR1,010).

Could there be other tax hikes coming? While we do not expect the impact tobe significant to overall net profit (at an estimated 1-14% annual impact), it couldsignal that the Government is willing to increase taxes for the plantation sector,should the need arise. One way this could potentially be done is to raise exporttaxes on CPO, to be on par with that of Indonesia. While this wou ld reduce income for the planters, it would also result in levelling the playing field with theIndonesian planters, resulting in Malaysian CPO becoming more competitiveglobally, which could in turn, improve export volumes.

Impact not very significant. We have laid out the impact of this increase inforeign levy to the Malaysian planters and timber players in Figure 1. The timberplayers would be affected by the higher levy for the manufacturing sector - fortheir plywood mill operations and for the plant ation sector – for their palm oioperations. The company which could be impacted the most is Felda Global,while KL Kepong would be impacted the least. No changes were made to ourforecasts for the companies under coverage, given the insignificant impact. Maintain Overweight on plantation sector. We maintain our Overweightstance on the Malaysian plantation sector, based on the premise that El Nino willresult in a tight CPO supply environment and push up CPO prices in 2016. Ourtop picks in Malaysia are Genting Plantations and KL Kepong, both of which arewell-managed companies with decent FFB growth prospects and an efficient coststructure. Key downside risk includes a significant slowdown in demand fromIndia and China and stronger than expected production of CPO in Malaysia andIndonesia.