• Upgrade to HOLD
• Valuations fair
• But no near-term catalyst

Soybean futures tumble

According to Bloomberg1, soybean futures fell for the 10th straight session on Friday -its longest slump in 41 years, weighed by expectations that the US could reap a record high crop this year, bolstered by milder-than expected weather forecast for the growing regions. The USDA has raised its stockpile forecast (31 Aug 2015) to 415m bushels, up sharply from 325m forecast made in Jun. It expects world inventories to hit a record 85.31m tons, versus 82.88m previously forecast.

Could start to weigh on CPO prices

Besides soybean prices, prices of corn (which can be made into substitute oil) have also tumbled since May to their lowest levels since 2010. In the same vein, we believe that the downward spiral in soy and corn prices could also weigh on CPO (crude palm oil), given that it is also viewed as an oil substitute (but slightly behind in the pecking order i.e. consumers tend to switch up to soy and corn oils if the price differentials are not significant). Indeed, we note that the SoyCPO premium has narrowed considerably to the 13-year average.

No near-term catalyst for GAR

Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to remain vulnerable to further pullbacks in CPO prices. Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. While Asia is expected to experience drier-than expected conditions due to the El Nino phenomenon, experts remain divided over the severity of the impact. We have built in a modest impact and are unlikely to revise our US$830/ton forecast at this stage.

Upgrade to HOLD

With 2Q14 results just around the corner, we also hold off adjusting our estimates for now. Nevertheless, the stock has retraced quite a bit since its 1Q14 results announcement on 14 May, falling 10% to our S$0.55 fair value (based on 13.5x blended FY14/FY15F EPS). While we do not see any near-term catalyst, we upgrade our call from Sell to HOLD on valuation grounds.

Source: OCBC Research - 15 Jul 2014