Sunday, April 5, 2009

Golden Agri Resources - OCBC

Most negative news reflected . Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around S$0.29-0.30, where we believe that the current share price should have captured most, if not all, of the negative news. In fact, we are starting to see some signs of stability in both crude oil prices as well as CPO prices. (See Exhibit 1 for recent price trends), although industry experts at the recently concluded 20th Palm and Lauric Oils Conference/Exhibition 2009 in Kuala Lumpur expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. However, even at the bottom of this range,which is around US$416/ton, we still expect GAR to remain profitable as its cost of production is less than US$250/ton.

Worst may be over. Although there is still some uncertainty about the global economy, we believe that the worst may be over. For one, we continue to see pretty inelastic demand for CPO as cooking oil - a basic necessity. And should there be a prolonged economic slump, we may even see an increase in demand for CPO as a cheaper substitute by both consumers and even companies. Meanwhile, we also expect GAR to benefit from the easing fertiliser prices, which we understand have fallen by some 30% from the peak in 2H08, although we expect the bulk of the impact to come in 2Q09. And even if CPO prices stagnate around here (our assumption is US$500/ton), GAR's revenue should still get a boost from the expected 7-10% increase in production. Finally, GAR has also put in measures - both operationally and fiscally - to prepare for what it sees as a challenging year. Key among these will be more prudent spending - GAR expects to cap its capex to US$200m, down from US$244m in FY08.

Re-rating of plantation stocks. In the recent run-up in the market, most plantation stocks have also been re-rated, as investors cautiously shift towards early-cycle recovery plays such as commodities. Based on yesterday's closing prices, we note that the sector average is now hovering around 8.9x FY09F EPS. As such, we will also raise our valuation multiple from a very conservative 6x to 8x FY09F EPS, which in turn bumps up our fair value estimate from S$0.29 (adjusted for the recent bonus issue) to S$0.40. Given the 40% upside potential, we also raise our rating from Hold to BUY.

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