Golden Agri-Resources Ltd

OCBC on 14 June 2012

Given the continued uncertainties in Europe, US and even China, we believe that the commodities sector could face increased headwinds; which could also affect CPO (crude palm oil) prices. In view of the increasingly less optimistic outlook, we are also paring our CPO assumptions for this year to US$925/ton from US$1000 previously. Golden Agri-Resources (GAR), being one of the largest CPO plantation owners in the world, is likely to be affected. Based on our new CPO assumption, we will be paring our FY12 forecasts by 3% (we estimate that every US$10-drop in CPO prices will trim 0.4% off our FY12 forecasts). Keeping our valuation peg at 12.5x FY12F EPS, our fair value eases slightly from S$0.77 to S$0.74. But we think that most of the negatives have been into account, hence we maintain our BUY rating on the stock.

Potential economic headwinds
The continued uncertainty in the Eurozone, sluggish economic growth in the US, and the slowing economic growth in China represent potential headwinds for the commodities sector. Although we were generally more positive on the soft commodities, we believe that prices of these soft commodities would not be immune to any pullback, albeit by a smaller extent.

Easing CPO assumptions
Similarly, CPO (crude palm oil) prices are also expected to drift lower, in line with crude oil prices, should the economic headwinds persist. Industry watchers are expecting CPO prices to ease in the second half of 2012, with some even forecasting for it to fall to as low as MYR2450/ton in 4Q12 if Brent crude prices drop to US$80/barrel (high correlation of 0.82). Currently, the benchmark Aug contract on Bursa Malaysia Derivatives is currently hovering around MYR2989/ton, or US$943/ton. In view of the increasingly less optimistic outlook, we are also paring our CPO assumptions for this year to US$925/ton from US$1000 previously.

Impacts upstream players
While the lower CPO prices will affect the whole CPO industry, we believe that upstream players are likely to feel the impact most; although this could be mitigated by lower export taxes and also increasing downstream activities. As such, Golden Agri-Resources (GAR), being one of the largest CPO plantation owners in the world, is likely to be affected. Keeping our production assumptions and margins unchanged, we estimate that every US$10-drop in CPO prices will trim 0.4% off our FY12 forecasts.

Maintain BUY with lower S$0.74 fair value
Based on our new CPO assumption, we will be paring our FY12 forecasts by 3%. Keeping our valuation peg at 12.5x FY12F EPS, our fair value eases slightly from S$0.77 to S$0.74. But we think that most of the negatives have been into account, hence we maintain our BUY rating on the stock.