Fair value S$0.465
add: 12m dividend forecast S$0.010
versus: Current price S$0.54
Downside risk remains
• Weak CPO outlook
• Recent rebound is premature
• Downside risk remains
Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to feel the negative impact of further pullback in CPO (crude palm oil) prices, especially after the recent rebounds in prices of CPO and GAR shares. With demand from both China and India – two of the world’s largest import markets for CPO – likely to remain soft, we believe that the worst is not over yet for the upstream players. Hence we maintain our SELL rating and S$0.465 fair value (still based on 11x blended FY13/FY14F EPS).
CPO outlook remains weak
The outlook for CPO (crude palm oil) prices is likely to remain weak as market watchers continue to expect further weakness in 2H13, weighed by expectations of higher CPO production and also increased supply from vegetable substitutes like soy and corn oils. According to Dorab Mistry, director at Godrej International Ltd, “the rally in CPO prices has just about run its course and will face downward pressure from here”. Mistry now expects to see new lows in vegetable oil and particularly in palm and lauric oil in early Jan .
Upstream players to feel negative impact most
Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to feel the negative impact the most. Over the past three years, GAR share price has shown a strong 0.8 correlation to CPO prices. And in wake of the recent rebound in CPO prices and the corresponding rebound in GAR share price, we suspect that any pullback could come quite swiftly. Nevertheless, management continues to remain upbeat about the long-term prospects of the palm oil industry, and will continue to increase its production of sustainable palm oil, improve operating efficiency and also optimise its downstream value chain opportunities.
Maintain SELL with S$0.465 fair value
But in the short term, the prospects for GAR remain more negative. We also note that import of vegetable oils into India has fallen by nearly 17% MoM in Aug, led by crude soy oil (down 46%) and RBD palm olein (down 33%). We note that Fitch has recently warned that CPO plantation companies in Asia could face slower demand from both China and India – two of its largest import markets . As such, we do not believe that the worst is over yet and hence we maintain our SELL rating and S$0.465 fair value (still based on 11x blended FY13/FY14F EPS).
Publish date: 18/09/13