Thursday, 25 June 2015

Golden Agri-Resources

OCBC on 17 June 2015

Golden Agri-Resources (GAR) could continue to see a somewhat muted near-term outlook; this as the recent rally in CPO (crude palm oil) prices is expected to run out of steam, damped by falling demand for palm oil after Ramadan and also higher production as the industry heads into the peak production period. Furthermore, with the prices of substitute vegetable oils like corn and soy likely to fall further in the coming months due to oversupplied conditions, we fear that this could also weigh on substitution demand for palm oil. Having said that, current El Nino phenomenon is expected to bring much drier conditions to Indonesia, which could affect CPO production. Still, experts believe that any impact is likely to come later (probably end 2015 or early 2016). As such, we maintain our SELL rating on GGR with an unchanged S$0.35 fair value (based on 13.5x FY15F EPS).

CPO price rally seen fizzling out
According to a Reuters report, the recent rally in CPO (crude palm oil) prices to a 3-month high could be running out of steam and has stubbornly stayed below this year’s peak of MYR2400/ton (hit in early Mar); this as the buying ahead of the Muslim festival of Ramadan peters out and the industry heads into the peak production period. But we also noticed that the USD has appreciated 6% against the MYR since end Apr. Another reason we note could be due to the continued softening in the prices of substitute vegetable oils like soy and corn, no thanks to the bumper harvests in the US and South America. 

Brazil corn crop could worsen market glut
In a separate Bloomberg report, the upcoming corn harvest from Brazil is expected to be bigger than ever, where market watchers believe it could flood an already oversupplied global corn market and depress prices further. We note that the corn futures are back to near 5-year lows (corn prices have slumped 24% in the past year). Meanwhile, the price differential between soy and CPO prices has also narrowed significantly to below US$300/ton, thus reducing the substitute demand for CPO. And as long as the differential stays below the near-15 year average of US$376/ton, it could continue to weigh on CPO demand.

El Nino effects are more pronounced this year
Having said that, much drier conditions are expected with the coming of the El Nino phenomenon in Indonesia, with some experts even saying the effects could last well into 2016. While some plantation stocks have run up on this news, any impact on production is likely to come later; this as it usually takes as long as 6-9 months for the tree stress to show up. Hence, we believe that unless we see a strong recovery in demand, the near-term outlook for Golden Agri-Resources (GAR) remains somewhat muted. As such, we maintain our SELL rating on the stock with an unchanged fair value of S$0.35 (still based on 13.5x FY15F EPS).

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