• Down 14% since 12 Nov
• Still no positive catalyst
• SELL for now

Tumbled to our fair value

Golden Agri-Resources’ (GAR) share price tumbled some 13.7% to an intraday low of S$0.44 on 1 Dec; this after posting its worst set of quarterly results since 1Q09 on 12 Nov, which saw its reported NPAT plunging some 86% YoY (-84% QoQ) to just US$4.4m in 3Q14, despite revenue rising YoY (-10% QoQ) to US$1844.1m. Although its share price has fallen to our fair value of S$0.44, we do not think that the worst is over yet.

Weaker crude may continue to weigh on CPO prices

For one, the uncertainty over crude prices could continue to weigh on crude palm oil (CPO) prices, mainly due to the bio-diesel link. Since 21 Nov, crude prices have tumbled nearly 15% from over US$80/barrel to a 5-year low of US$68; but industry experts believe prices could fall further to US$60/barrel – a level that Saudi Arabia is said to be comfortable with . Over the same period, CPO prices slipped by a smaller 2.7%, suggesting that prices could have more to fall.

Lower CPO demand during winter months

In addition, the demand for CPO is also expected to decline going into the winter months; this as palm oil solidifies at much higher temperatures compared to other vegetable oils, making it less “attractive” to consumers in temperate countries. As such, we do not see much positive catalysts for CPO prices in the near term. We note that GAR – the third largest palm oil plantation owner globally – has a 0.8 correlation with CPO prices over the past two years.

Maintain SELL for the near term

In view of the recent development, we are paring our FY15 CPO assumption to US$700/barrel (also driven by the stronger USD/MYR rate); while this would lead to a 3.3% reduction in our FY15 earnings forecast, our fair value remains unchanged at S$0.44 (still based on 13.5x FY15 EPS) due to the higher USD/SGD assumption. Nevertheless, we keep our SELL rating for now as the stock could slip to S$0.40 before stabilizing.

Source: OCBC Research - 8 Dec 2014