• Muted near-term outlook for CPO
• Likely share price base at around S$0.40
• Upgrade to HOLD

FY14 NPAT down 64%

Golden Agri-Resources (GAR) reported a pretty weak set of FY14 earnings as expected. While revenue jumped 15.7% to US$7619.3m, or about 4.5% above our forecast, buoyed by the expansion of its palm downstream business; reported net profit tumbled 63.5% to US$113.6m, hit by fair value loss of S$133.7m for biological assets. Excluding this item, core earnings still fell 30.5% to US$221.3m, but was just 1.3% below our forecast. GAR declared a final dividend of 0.177 S cent/share, versus 0.515 S cent in FY13.

Near-term volatility likely to remain

Going forward, management expects its operating performance to be affected by the fluctuating commodity prices, sustainability of the global economy, climatic conditions, as well as developments in China and Indonesia. It adds that is reviewing its oilseeds business strategy to improve operating performance, given that the operating environment in China remains challenging in the near to medium term.

Still expanding for the future

Nevertheless, GAR remains positive about the long-term prospects of the palm oil industry. For 2015, GAR plans to spend US$130m to expand palm oil plantations via organic growth and acquisition. It is also exploring new initiatives for yield improvements and cost efficiency. On the downstream, it intends to spend US$170m to extend product portfolio, distribution coverage and global market reach as well as logistic facilities to enhance its integrated operations. GAR will further increase downstream processing capacity in strategic locations.

Upgrade to HOLD with S$0.42 FV

While we do not expect to see any positive catalyst in the near term, we note that the share price has corrected quite a bit and may have found a base at around S$0.40, suggesting most of the negative news has been captured. Nevertheless, we are paring our FY15 estimates by 5-13% to reflect the weak CPO outlook. Our fair value eases from S$0.44 to S$0.42, now based on 13.5x FY15F EPS (versus blended FY14/FY15F previously). Upgrade to HOLD.

Source: OCBC Research - 2 Mar 2015