• Rebound likely temporary
• More near-term downside risks
• SELL above S$0.45

Hit 52-week low of S$0.41

Golden Agri-Resources’ (GAR) share price recently hit a fresh 52-week low of S$0.41 (on 22 and 23 Jan), no doubt weighed by the recent pullback in CPO prices. As warned in our 14 Dec 2014 report, we believe that the stock could slip to S$0.40 before stabilizing. Although the stock did make a rebound shortly thereafter to S$0.435, we believe that the worst may not be over.

Crude prices could see another leg down For one, the persistent weakness in crude oil prices could continue to weigh on CPO prices, given the bio-diesel link (which has since broken down as it is even more unprofitable to process CPO or other vegetable oils into bio-diesel). While crude prices are now hovering between US$45 and US$48/barrel, some market watchers are not ruling out another leg down for crude; some speculate that prices could tumble to US$30/barrel, while others expect the weakness in crude prices to be fairly prolonged (the expectation of a rebound in crude has been pushed back towards end-2015 instead of mid-2015).

Sluggish demand likely in winter months

Secondly, the demand for CPO is also expected to decline in the winter months; this as palm oil will solidify at much higher temperatures as compared to other vegetable oils. Thirdly, the prices of competing vegetable oils like soy and corn are still on the soft side, further reducing the substitution effect. Last but not least, the expected growth in demand could be slower than expected, after the cut in global economic growth expected for 2015, especially in China.

Maintain SELL on strength

Although GAR’s share price is currently hovering around our unchanged fair value of S$0.44 (based on 13.5x FY15 EPS, supported by a strengthening USD), we do foresee more near-term downside risk. As such, we maintain our SELL rating on the stock, especially above S$0.45.

Source: OCBC Research - 2 Feb 2015