What is the news? How do we view this?

Golden Agri, hit by the drop in CPO prices following the recent slide in crude oil prices, saw its share prices fell to a one-year low last week. The positive industry newsflow (on 10 April 2013) regarding Malaysia’s March inventory drawdown seems short-lived, as the fall in crude oil prices dimmed the demand prospects for the tropical oil as feedstock for biofuels. Golden Agri’s share price has fallen 15% in the past 3 months and down 30% from its 52-week high (CPO down 7% and down 34% respectively).

Despite inventory hitting to a 7-month low of 2.17mn tonnes (-11% mom) in March 2013, the anticipated recovery in soybean supply from South America still remains a major concern, as this will push down soybean oil prices (a close substitute for CPO). Furthermore, CPO supply is expected to stay healthy in 2013, which in turn will cap upside on prices. At the recently concluded Palm Oil Conference 2013 in Kuala Lumpur last month, industry experts were mostly bearish on CPO price outlook. In view of these, it is unlikely that CPO price recovery in 1H13 will be as strong as previously anticipated. Thus we cut our CPO price forecasts for FY13E/14E by 5%/3% to US$820/$910 per MT.

Golden Agri has great plans to grow its downstream business via the recent high profile hires of seniors from Cargill and Louis Dreyfus, to tap on their valuable network and expertise. Albeit this will be good for the group in the long run (as it becomes less dependent on its upstream business), we think it will take some time for its downstream growth strategy to bear fruit, and we see near-term margin pressure due to higher salary costs.

Investment Actions?

We cut our FY13/14/15E earnings forecast by -4%/-2%/-1% on lower CPO price assumptions as well as factoring in higher salary costs. Albeit we believe that most of the negatives have been priced in, we do not see any near-term catalysts. Hence we lower Golden Agri to Neutral from Accumulate. Our new fair value of S$0.55 (Neutral), based on blend of PE (a conservative 12.0x FY13E) and DCF (cost of equity: 9.1%, terminal ‘g’: 2.5%) valuations, implies 12.5x FY13E earnings. Key risks to our target price include CPO production/prices stronger/weaker-than-expected.

Source: PhillipCapital Research - 22 Apr 2013