Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price has continued to do well, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton), aided by slightly better demand and supply factors. Note that our US$830/ton (MYR2650/ton) forecast has already taken these factors into consideration. But further CPO price upside may still be capped by the expected jump in global oilseed production. And as the market appears to be taking on a more “risk on” approach, we apply a higher 13.5x peg (versus 12.5x previously) to our FY14F EPS, thus raising our fair value from S$0.465 to S$0.50. But given the potential downside risk, we maintain our SELL rating.
CPO prices showing more signs of stabilizing
Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price has continued to do well, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton); this as on by increasing expectations of a likely lower CPO supply coming out from both Malaysia and Indonesia this year. Indeed, GAR expects its CPO production to decline some 5% this year, as opposed to its earlier 5-10% growth guidance. We believe that the recent announcement by the Indonesian government to double the mandatory bio-diesel blending to 10% from next year is also supportive of CPO prices. As such, some industry experts are expecting CPO to hit MYR2700/ton early next year, or up about 5% from here.
Likely cap on CPO price
In any case, our CPO price assumption for 2014 of US$830/ton (MYR2650/ton) has already taken into account these factors. In addition, we believe that further CPO price upside may still be capped by the expected jump in global oilseed production. In its latest forecast, the USDA is projecting for production to hit a record 499.4m tons for 2013/2014, up 4.3m tons from Sep, with higher soybean, sunflower-seed and rapeseed accounting for most of the rise. GAR is also expecting its CPO production to revert back to the usual 5-10% growth next year. In addition, we note that there could be further increases (albeit at a slower pace) in cash cost of production, driven by rising labour costs.
Valuations still look pricey
As the market appears to be taking on a more “risk on” approach, hence warranting a higher 13.5x peg (versus 12.5x previously) to our FY14F EPS, our fair value improves from S$0.465 to S$0.50. But given the potential downside risk, we maintain our SELL rating.
Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price has continued to do well, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton); this as on by increasing expectations of a likely lower CPO supply coming out from both Malaysia and Indonesia this year. Indeed, GAR expects its CPO production to decline some 5% this year, as opposed to its earlier 5-10% growth guidance. We believe that the recent announcement by the Indonesian government to double the mandatory bio-diesel blending to 10% from next year is also supportive of CPO prices. As such, some industry experts are expecting CPO to hit MYR2700/ton early next year, or up about 5% from here.
Likely cap on CPO price
In any case, our CPO price assumption for 2014 of US$830/ton (MYR2650/ton) has already taken into account these factors. In addition, we believe that further CPO price upside may still be capped by the expected jump in global oilseed production. In its latest forecast, the USDA is projecting for production to hit a record 499.4m tons for 2013/2014, up 4.3m tons from Sep, with higher soybean, sunflower-seed and rapeseed accounting for most of the rise. GAR is also expecting its CPO production to revert back to the usual 5-10% growth next year. In addition, we note that there could be further increases (albeit at a slower pace) in cash cost of production, driven by rising labour costs.
Valuations still look pricey
As the market appears to be taking on a more “risk on” approach, hence warranting a higher 13.5x peg (versus 12.5x previously) to our FY14F EPS, our fair value improves from S$0.465 to S$0.50. But given the potential downside risk, we maintain our SELL rating.
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