• Back to our fair value
• Negatives likely priced in
• Interesting around 47c or better

Fallen to our fair value

Golden Agri-Resources (GAR) has drifted down to our previous fair value of S$0.50 (based on 13.5x blended FY14/FY15F EPS) after posting a worse-than-expected set of 2Q14 earnings, such that its 1H14 core net profit only met 39% of our then full-year forecast. We have since pared our FY14F earnings estimate by 17% and also downgraded our call from Hold to Sell on 15 Aug. But at current levels, some of the negative news appears to be priced in.

Soy prices appear to be bottoming

For one, soy prices – the main reason for the drag on CPO prices – appear to be bottoming. Since crashing to a four-year low in Sep, soy futures are finally making a modest rebound of 3% since then. Similarly, CPO prices have staged a rather robust recovery of some 15% from a low of MYR1914 to around MYR2195; this also aided by stronger-than-expected demand from the European Union (net imports +5% to a record 3.48m tons in 1H14, according to Oil World.

No export taxes in Sep, Oct

Secondly, plantation owners may get a modest boost from the absence of export taxes on CPO – this after Malaysia scrapped the tax for both Sep and Oct, while Indonesia removed it for Oct in an attempt to help boost exports. However, some market watchers warn that the move may not be enough, given renewed signs of rising inventories. Nevertheless, others are hopeful that the onset of the drier weather in Malaysia and Indonesia could reduce production, thus helping to limit supply and keep CPO prices up.

Need to lower CPO price assumptions

Having said that, we still see the need to reduce our FY14 CPO price assumption to US$760/ton (FY15 to US$800/ton), down around 3-5% as we see reduced risk of a impactful El Nino effect on production in 2014 (probably a bit more in 2015). This in turn reduces our FY14 revenue and earnings estimates by around 3%; also drops our fair value to S$0.48 (still based on same 13.5x blended EPS). But from a valuation perspective, we upgrade our call to HOLD.

Source: OCBC Research - 9 Oct 2014