Golden Agri (GGR)’s FY12 earnings were disappointing due to inventory buildup in 4Q. The additional inventory will eventually be sold this year, helping to boost its CY13 bottomline. We are maintaining GGR as a Buy with our fair value lowered to factor in an increase in its share base. Our earnings forecast remains unchanged. GGR will be the prime beneficiary of a short-term rally in palm oil price, to be driven by seasonal inventory downcycle.

Poor 4Q. GGR’s 4Q core earnings fell by 68.7% q-o-q on a 19% decline in average CPO price and inventory buildup. The disappointing 4Q resulted in GGR registering only USD404.3m in core net profit, falling short of consensus forecast of USD481.7m and our forecast of USD496.6m. Realised CPO price fell by 10.1%, which could have been absorbed by its 15.5% production growth in the absence of logistics issue.

Inventory surge. At the end of 4Q, GGR held 520k tonnes of palm oil, which was up significantly from 390k tonnes at end-3Q. The additional 130k tonnes, if sold at its 4Q realized price of USD863 per tonne, would have resulted in extra net profit of USD54.5m, bringing full year earnings to USD458.8m, which would have been within consensus estimate but still slightly below our forecast.

Forecast unchanged. We are maintaining our FY13 earnings forecast of USD458m. Although we have built in more conservative costs, this will be mitigated by additional sales of 13k tonnes of palm oil.

A glance at GGR’s operational numbers. GGR achieved a 15.5% growth in its nucleus FFB production in FY12. Oil extraction rate was down from 23.0% for FY11 to 22.6% for FY12. During the year, the company did 13,600 ha of total planting (including plasma), of which 9,700 ha were new planting and 3,900 ha were replanting. As of end-2012, GGR has a nucleus planted area of 366,914 ha, of which 328,423 ha are mature. Including plasma, its hectarage stands at 463,426 ha.

Maintain Buy (Target SGD0.71). We believe palm oil prices could enjoy some relief rally in 1H this year as inventory eases off from now to May/June. Given its leverage to CPO prices and good liquidity, GGR is perhaps the best stock to play the short upswing in CPO prices.

Source: OSK Research - 01 Mar 2013