Golden Agri-Resources

OCBC on 7 Sept 2012

Golden Agri-Resources (GAR) plans to issue US$400m worth of 2.5% 5-year convertible bonds (CB) - convertible into new shares at S$0.8896 each (or premium of 28% over 5 Sep’s closing price of S$0.695). If all the bonds are converted, it would increase its existing share capital by 4.37%, or 561.1m new shares. GAR expects to raise net proceeds of some US$394.45m, which it intends to use for general corporate purposes. While we think that the company is just being opportunistic in raising capital, as the market is generally more receptive towards yield-bearing instruments amidst the low interest rate environment, the more muted outlook for CPO prices in 3Q and 4Q of 2012 could start weighing on sentiment. We have already taken into account a muted CPO price assumption; and unless we see a sharp pullback in prices, we believe that GAR should be able to meet our expectations. Hence, we continue to maintain our BUY rating and S$0.81 fair value (based on 12.5x blended FY12/13F EPS).

US$400m of convertible bonds
Golden Agri-Resources (GAR) plans to issue US$400m worth of 2.5% 5-year convertible bonds (CB) - convertible into new shares at S$0.8896 each (or premium of 28% over 5 Sep’s closing price of S$0.695). If all the bonds are converted, it would increase its existing share capital by 4.37%, or 561.1m new shares. The CB comes with a delisting put right which allows bondholders to require GAR to redeem all of the CBs should GAR shares cease to be listed. In addition, bondholders can also get GAR to redeem all or some of the CBs on 4 Oct 2015. Meanwhile, GAR has the right to redeem all of the CBs on or after 4 Oct 2015 (subject to certain conditions).

Using for general corporate purposes
GAR expects to raise net proceeds of some US$394.45m, which it intends to use for general corporate purposes. Recall that GAR has a planned capex of some US$500m this year, of which, it would use US$250m for plantation expansion, US$200m for downstream expansion, and US$50m for infrastructure improvements.

More muted CPO outlook
While we think that the company is just being opportunistic in raising capital, as the market is generally more receptive towards yield-bearing instruments amidst the low interest rate environment, the more muted outlook for CPO prices in 3Q and 4Q of 2012 could start weighing on sentiment. According to industry experts, the growing stockpile at Malaysia and potential weakening in demand in the northern hemisphere (due to winter) for CPO could keep prices at around MYR2900-3300/ton.

Maintain S$0.81 fair value
We have already taken into account a muted CPO price assumption; and unless we see a sharp pullback in prices, we believe that GAR should be able to meet our expectations. Hence, we continue to maintain our BUY rating and S$0.81 fair value (based on 12.5x blended FY12/13F EPS).