Golden Agri-Resources

CIMB Research on 10 Sept 2012

AT its teleconference last Friday, Golden Agri confirmed our suspicions that its planned bond issuance is a prelude to mergers and acquisitions (M&As). This is positive as it will help assuage concerns over usage of the funds and potential EPS dilution.

The near-term plan to use the funds to retire some short-term debt will cut potential EPS dilution to 3 per cent from our earlier 4 per cent estimate. We maintain "trading buy" rather than "outperform" due to our medium-term positive view on crude palm oil (CPO) price. But we have lowered our target price (based on unchanged 14x PE, which is tagged to our target market PE) by 5 per cent to adjust for the recent conversion of warrants.

At a teleconference last Friday, Golden Agri's executive director, Rafael Concepcion, and director of investor relations Richard Fung fielded analysts' questions on its proposed US$400 million convertible bond issue. The group revealed that it is gearing up for a few potential M&As, both upstream and downstream. Most of the opportunities being considered are in Indonesia and are non-related party transactions. While the group's business focus remains upstream, it is also looking at potential downstream opportunities, mostly to strengthen the distribution of its palm oil. Plans to acquire estates will strengthen the group's output growth prospects. It also explained that funding available through the banks in Indonesia is limited despite its strong balance sheet. This is due to the requirements imposed on Indonesian banks to meet legal lending limits to a single corporate group. In Golden Agri's case, this is calculated based on their exposure to the Sinarmas group. We gather the availability of funding from Singapore banks is also limited.

The teleconference helped to clarify concerns over the bond issue, and was in line with our deduction that the funds are earmarked for potential M&A opportunities. The plan to use the funds to retire some short-term debt that carry lending rates of 5 per cent is also positive and will help lower the potential earnings dilution from the bond issue.

We continue to advice investors to accumulate on share price weakness to position for potential M&A news flows and rise in CPO price on the back of potential disruptions to supply in the event of an El Nino.
TRADING BUY