• 14% pullback in price
• Less downside risk
• Upgrade to HOLD

Price pullback as expected

Despite posting a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price recently hit a high of S$0.61 on 18 Nov, buoyed by stabilizing CPO (crude palm oil) prices; this likely on increasing expectations of a lower CPO supply coming out from both Malaysia and Indonesia in 2013. We believe that the recent announcement by the Indonesian government to double the mandatory bio-diesel blending to 10% from next year was also supportive of CPO prices. However, as noted in our report dated 20 Nov, we believe that the run-up in share price looked overdone. And true enough, GAR’s share price has since corrected over 14% from that high.

Limited CPO price appreciation in 2014

As before, we believe that most of the positives have been captured in the recent run-up in CPO prices. In addition, we believe that further CPO price upside may still be capped by the expected jump in global oilseed production. In its latest forecast, the USDA is projecting for production to hit a record 499.4m tons for 2013/2014, up 4.3m tons from Sep, with higher soybean, sunflower-seed and rapeseed accounting for most of the rise. Note that GAR also expects its CPO production in 2014 to revert back to the usual 5-10% growth. In any case, our CPO price assumption for 2014 of US$830/ton (MYR2650/ton) has already taken into account these factors. It also offers an upside of nearly 12% from an average price of US$744/ton in 2013; but we are unlikely to see a return to the US$911/ton average seen in 2012.

Valuations looking less pricey

With the recent correction in share price, we note that GAR is just just 5% above our unchanged fair value of S$0.50 (based on 13.5x FY14F EPS). As such, we upgrade our rating from Sell to HOLD.

Source: OCBC Research - 16 Jan 2014