Monday 10 November 2014

Golden Agri-Resources

OCBC on 5 Nov 2014

Golden Agri-Resources (GAR) is due to release its 3Q14 results on 12 Nov, where eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear. Until then, we maintain our HOLD and S$0.48 fair value.

Stock has performed as expected
We last upgraded our call from Sell to HOLD with a new S$0.48 fair value on 9 Oct, with a view that Golden Agri-Resources (GAR) should start to look interesting around S$0.47 or better, as some of the negative news would have been priced in. True enough, we saw the stock recover from a recent low of S$0.465 shortly after to a recent S$0.525 intraday high. 

Outlook appears to be improving
Going forward, we think that the outlook appears to be improving, driven by more positive newsflow of late - the key among them is the recovery in CPO prices. Currently, CPO prices are hovering around MYR2330/ton, or about 20% above the MYR1929 low on 29 Aug, driven by hopes that the global glut in cooking oils may soon be over. And with output likely to be affected by the spate of drier-than-usual weather in the early part of this year, market watchers believe that CPO prices should recover further to MYR2500/ton by 1Q15 . In addition, Malaysia’s plan to increase the diesel blending from 5% to 7% in Nov this year should also increase the demand for palm bio-diesel.

But eyes will be on its China operations
Having said that, we think that sentiment could still remain somewhat cautious ahead of GAR’s 3Q14 results announcement on 12 Nov, where the eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear.

Continue to trade the range
In the meantime, we believe investors can continue to trade the range as indicated above, while we maintain our HOLD call and S$0.48 fair value.

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