Most liquid proxy for CPO price
Golden Agri stands out among the regional planters for its liquidity (the highest) and palm oil estate size (second largest). However, we feel that the stock is fairly valued at the current price level as its P/E is in line with its historical average P/E.
Furthermore, we expect the group's downstream expansion to take time to bear fruit. There is also a risk that the group may write down the value of its biological assets due to the lower CPO price, which may lead to weaker reported earnings and a higher gearing ratio. Under our new rating structure, our call changes from Neutral to Hold. We maintain our target price, based on 14x CY15 P/E (based on historical 5-yr avg).
Brighter prospects in 2014
We expect Golden Agri to post better earnings in FY14, driven by stronger production, higher selling prices and a slower rise in estate costs. We forecast the group's FFB output to rise 13% in FY14, thanks to improving yields from its estates, which are expected to recover from the low biological cycle experienced in 2013. To recap, the group's FFB production dipped 5% in 9M13, missing our expectations and the group's guidance of 5-10% growth, due mainly to the low biological cycle. We estimate CPO price to rise by 12% to an average of US$950 per tonne in FY14, helped by higher biodiesel usage in Indonesia and lower palm oil stocks.
M&A needed to lift growth
The slower expansion of planted estates over the past few years may crimp Golden Agri’s future output growth unless it steps up its M&A efforts. We gather that the group added approximately 28k-29k ha (10% growth rate) of planted estates to its stable in 2008-09. But the growth rate has trickled off to only 6,000ha (2% growth rate) in 2012. On top of this, its existing estates are getting older. 26% of the group's estates were above 18 years of age in 2012, up from 12% in 2009.
Downstream expansion is good for the long term
Golden Agri currently refines in-house around 50% of its palm products. Its strategy is to have downstream capacity that could cover all its upstream production and expand its distribution channels. We are positive on the long-term prospects of this plan but do not expect it to be significantly earnings-accretive in the near term.
Publish date: 02/12/13