By Carey Wong
Wed, 18 Mar 2009, 09:51:21 SGT

Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around current levels, mainly due to the lack of short-term catalysts. In the near to medium term, there is likely limited upside for CPO prices – industry experts expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. At the recently concluded 20th Palm and Lauric Oils Conference/Exhibition 2009 in Kuala Lumpur, these industry experts believe the pressure on CPO prices will come from an increase in output, weaker soybean oil prices and declining demand from countries such as China and India due to the global economic slowdown. Although we do not see any near-term catalysts, we believe that most, if not all, of the negatives have been priced in. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would still be buyers closer to S$0.25.

Muted CPO outlook. Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around current levels, mainly due to the lack of short-term catalysts. Being one of the largest palm oil plantation owners around, GAR is more susceptible to fluctuations in crude palm oil (CPO) prices (Exhibit 1). And in the near to medium term, there is likely limited upside for CPO prices, as industry experts expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. At the recently concluded 20th Palm and Lauric Oils Conference/Exhibition 2009 in Kuala Lumpur, these industry experts believe the pressure on CPO prices will come from an increase in output, weaker soybean oil prices and declining demand from countries such as China and India due to the global economic slowdown.

No boost from crude oil. Meanwhile, we also do not expect CPO prices to get any boost from crude oil prices, which are not expected to show any strong recovery due to the still weakening global economy. Although crude oil prices appear to have stabilised around US$40-50/barrel, we note it was mainly due to a cut in supply, rather than a pick up in demand. In any case, CPO prices have actually risen back above crude oil on a per barrel comparison (Exhibit 2). While this shows that there is still underlying support for CPO prices, due to demand as cooking oil, the flip side is that CPO is not cost viable as a fuel replacement without hefty subsidies.

Worst may be over. But we believe that the worst may be over. For one, GAR should benefit from the easing fertiliser prices, although we expect the bulk of the impact to come in 2Q09. And even if CPO prices stagnate (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.

Maintain HOLD. Although we do not see any near-term catalysts, we believe that most, if not all, of the negatives have been priced in. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would still be buyers closer to S$0.25.