Golden Agri (GGR), as a sector proxy, will see its stock price surge if the current upswing in palm oil prices can be sustained. The stock is also proxy to Indonesia’s strong palm oil consumption growth and improvement in living standard. The company is boosting its refining capacity and beefing up its downstream team, which will see GGR be a more dominant player in global edible oil business over time. We are maintaining our Buy call with our FV unchanged at SGD0.82.

Explosive branded cooking oil sale. GGR’s cooking oil sale, both branded and unbranded, has been steadily growing in the past decade. Since 2010, its branded cooking oil and margarine sales volume growth has been accelerating, particularly in 2012, suggesting that Indonesians are becoming more affluent. This also supports Oil World’s data, which shows very strong edible oil consumption per capita growth in Indonesia. Since 2007, Indonesia has chalked up a 10.1% CAGR compared to the global average of 2.4%.

Adding new downstream capacity. GGR has been steadily increasing its downstream capacity over the years. This is in line with its upstream production growth as well as to meet surging cooking oil demand in Indonesia. The company has two new refineries of with total capacity of 600k tonnes per annum capacity coming on stream this year, which will boost its total capacity to 1.98m tonnes. This means that its refining capacity will overtake its nucleus CPO production this year. Another 600k tonnes per annum refinery capacity will be operational in early-2014, bringing its capacity to 2.58m tonnes.

Production growth moderates in 2013. Management is guiding for slower production growth for the company this year after the very strong growth last year. Its 9MFY12 nucleus production was up by a very commendable 12%, a rate we expect to be sustained into its 4Q. We have factored in a growth rate of 8% for FY13 and 5% for FY14.

Beefing up downstream team. GGR recently made some high profile hires for its downstream business, namely Hemant K Bhatt, who spent 26 years in Louis Dreyfus, and Paul John Hickman, a 25-year veteran at Cargill. This is to help fulfill its global downstream ambitions i.e. over time GGR will become a much more dominant player with a more complete value chain.

Source: OSK Research - 07 Feb 2013