As the second largest palm oil plantation owner in the world, Golden Agri-Resouces (GAR) stands to gain greatly from any rebound in CPO prices. Indeed, we note that prices have tracked back above MYR3000/ton in Jul, off the Jun low of MYR2850, although still somewhat softer than the average of MYR3220 seen in 2Q12. We had earlier adjusted our 2012 CPO price assumption down to US$925/ton, which is already quite conservative and should have captured most of the downside risk. Maintaining our market neutral 12.5x PER peg, we push out our valuations to blended FY12/FY13, resulting in a boost to our fair value from S$0.74 to S$0.81. Maintain BUY.
New sustainability report out
Golden Agri-Resources (GAR) last week issued its second sustainability report. We believe GAR’s commitment towards the sustainability of palm oil cultivation in Indonesia should improve its standing among the international food companies. Recall in 2010, several large food companies such as Nestle stopped purchasing CPO from the group, following allegations by Greenpeace that PT Smart had developed on peat land and primary forests.
Potential support to CPO prices
As the second largest palm oil plantation owner in the world, GAR stands to significantly benefit from a rebound in CPO prices. CPO prices have tracked back above MYR3,000/ton in Jul, rebounding off the Jun low of MYR2,850. However, CPO prices are still slightly softer than the MYR3,220 average seen in 2Q12. We believe that a recovery of CPO prices is likely, given the concerns over the impact of a prolonged drought in the US mid-west, affecting the potential supply of soybean crop. Based on the price movements over the last five years, CPO and soybean prices have a strong correlation of 0.85, suggesting CPO prices will likely mirror an increase in soybean prices quite closely.
Our assumptions are quite conservative
In our previous report dated 14 Jun, we eased our CPO forecast for this year to US$925/ton, given the increased economic headwinds coming out of the Eurozone, the US and even China. Although we were generally more positive on the soft commodities, prices of these soft commodities are not immune to any pullback, albeit by a smaller extent, in the event of a economic downturn. Nevertheless, our assumptions are already quite conservative and should have captured most of the downside risk.
Raising fair value to S$0.81
While we are maintaining our market neutral 12.5x PER peg, we push out our valuations to a blended FY12/FY13, resulting in a boost to our fair value from S$0.74 to S$0.81. MaintainBUY.
Golden Agri-Resources (GAR) last week issued its second sustainability report. We believe GAR’s commitment towards the sustainability of palm oil cultivation in Indonesia should improve its standing among the international food companies. Recall in 2010, several large food companies such as Nestle stopped purchasing CPO from the group, following allegations by Greenpeace that PT Smart had developed on peat land and primary forests.
Potential support to CPO prices
As the second largest palm oil plantation owner in the world, GAR stands to significantly benefit from a rebound in CPO prices. CPO prices have tracked back above MYR3,000/ton in Jul, rebounding off the Jun low of MYR2,850. However, CPO prices are still slightly softer than the MYR3,220 average seen in 2Q12. We believe that a recovery of CPO prices is likely, given the concerns over the impact of a prolonged drought in the US mid-west, affecting the potential supply of soybean crop. Based on the price movements over the last five years, CPO and soybean prices have a strong correlation of 0.85, suggesting CPO prices will likely mirror an increase in soybean prices quite closely.
Our assumptions are quite conservative
In our previous report dated 14 Jun, we eased our CPO forecast for this year to US$925/ton, given the increased economic headwinds coming out of the Eurozone, the US and even China. Although we were generally more positive on the soft commodities, prices of these soft commodities are not immune to any pullback, albeit by a smaller extent, in the event of a economic downturn. Nevertheless, our assumptions are already quite conservative and should have captured most of the downside risk.
Raising fair value to S$0.81
While we are maintaining our market neutral 12.5x PER peg, we push out our valuations to a blended FY12/FY13, resulting in a boost to our fair value from S$0.74 to S$0.81. MaintainBUY.
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