Friday 5 April 2013

Golden Agri-Resources

OCBC on 4 Apr 2013

Golden Agri-Resources (GAR), after reporting a disappointing set of FY12 results at end Feb, has languished below S$0.60 in recent weeks; and may continue to do so in lieu of the still-weak near-term outlook. The main reason for the expected near-term underperformance comes from the uninspiring CPO (crude price oil) prices, which has again fallen below MYR2,400/ton. The other reason is probably the still-high stockpiles seen at several planters in both Malaysia and Indonesia. Despite the near-term headwinds, management remains relatively upbeat about its prospects, as it still sees robust demand growth for CPO as an edible oil from emerging and development countries. For now, we intend to maintain our HOLD rating and S$0.63 fair value (based on 12.5x FY13F EPS); and we see value emerging at S$0.55 or better.

Near-term outlook remains weak
Golden Agri-Resources (GAR), after reporting a disappointing set of FY12 results at end Feb, has languished below S$0.60 in recent weeks; this after falling from S$0.635 to as low as S$0.565. Going forward, we do not expect the stock to make any significant breakout of this range, given the still-weak near-term outlook.

CPO prices continue to struggle 
The main reason for the expected near-term underperformance comes from the uninspiring CPO (crude price oil) prices, which has again fallen below MYR2,400/ton, weighed by worries that global demand will remain persistently weak, hurt by the ongoing crisis in Europe. GAR, being the second largest oil palm plantation owner in the world, is highly sensitive to CPO price movements – we note a 0.71 correlation between its stock price and CPO prices over a three-year period. 

Inventory issue remains key
Another reason for the poor sentiment probably comes from the still-high stockpiles seen at several planters in both Malaysia and Indonesia. For GAR, the group continued to see another increase in its CPO stockpile - inventory at end Dec has risen by another 8%, or 37k tons, to 520k tons, as demand from China and India remained sluggish. According to management, this is an excess of some 200k tonnes above its usual holding of ~320k tons. Nevertheless, GAR remains upbeat that it can reduce the surplus by end 1H13, citing a growing demand for bio-fuel as current CPO prices (<US$900/ton) already make it viable as an alternative for crude oil. 

Maintain HOLD as value emerging
Despite the near-term headwinds, management remains relatively upbeat about its prospects, as it still sees robust demand growth for CPO as an edible oil from emerging and development countries. For now, we intend to maintain our HOLD rating and S$0.63 fair value (based on 12.5x FY13F EPS); and we see value emerging at S$0.55 or better.

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