Golden Agri-Resources

DMG & Partners Research on 27 June 2012

FOLLOWING our Asean Corporate Day in Singapore during which Golden Agri-Resources met up with 11 fund managers, we are maintaining our "buy" call as well as the stock's fair value of $0.97.

Golden Agri's stock price has been dragged down by weak market sentiment and a correction in palm oil price.

We believe that palm oil price has bottomed, supported by Malaysia's disappointing production and unfavourable weather in North America's current soybean planting season. Golden Agri's current cheap valuation represents a good buying opportunity.

Amid other plantation companies' guidance of weaker yields this year due to tree stress, Golden Agri is guiding for a 5-10 per cent production growth this year.

Management believes its trees are in good shape and not stressed out as its yield during the peak production in Q3 last year was not very high. Its production during seasonal peaks has been declining for the last two years as the newly mature areas came into production.

Considering that Astra Agro Lestari's (AALI) production growth came in at 4.3 per cent in the first five months of this year and picked up steam in May, Golden Agri's guidance does not seem far-fetched as the company has younger trees than AALI.

We have factored in a conservative 5 per cent production growth in our earnings forecast, which implies that there is room for upgrade.

Management remains optimistic that its new planting target of 20,000 hectares this year is achievable despite having achieved only 1,700 ha in Q1. Compared to 2011, during which the company managed to complete 1,100 ha in Q1, the new planting for this year certainly showed an improvement.

Management believes that new planting will pick up pace in the subsequent quarters. In 2011, half of the new planting took place in Q4 alone. Golden Agri has 100,000 ha of landbank with licence for planting. However, about 5 per cent were found to be of high conservation value and will need to be conserved. This still leaves sufficient landbank to sustain five years of new planting.

Of the Big Four listed plantation companies, Golden Agri is the purest palm oil stock given that other players such as Wilmar, Sime Darby and IOI Corp have sizeable non-palm oil businesses. This, together with the stock's high liquidity, makes its stock price highly sensitive to palm oil price movements.

We believe that palm oil price has bottomed largely due to Malaysia's weak production this year, which could be exacerbated by the recent dry weather.

Golden Agri is trading at around 10 times forward PE. Considering its strength and scale of operations, we find the stock inexpensive, especially in comparison with Malaysia's large cap.

BUY