• New seeds to sustain production growth
• Eyes on CPO demand in 2H
• CPO price upside likely capped

New High-yielding Material Positive for the Longer Term

In line with efforts to increase productivity, Golden Agri-Resources’ subsidiary PT SMART Tbk now has two clones of high-yielding oil palm planting material that is approved for use by Indonesia’s Ministry of Agriculture. These planting materials (Eka 1 and Eka 2) are envisaged by the company to potentially increase yields to more than 10 tonnes of CPO/hectare/year at prime age under optimal weather and soil conditions, which is a contrast to Indonesia’s industry average yield of below four tonnes/hectare/year.

Over the next five years, the group will cultivate a sufficient quantity to plant over a larger commercial area starting in 2022. This longer term development is particularly important, in view of their estates’ average age of ~16 years (including plasma), which is considered to be one of the oldest among plantation peers. Replanting activities with higher-yielding seeds are thus expected to remain a key focus to keep a favourable age profile and sustain production growth.

Entering Peak CPO Output Period; Cap on Price Upside

A series of data was also recently released by Malaysian Palm Oil Board (MPOB). CPO production in May was up 21% YoY to 1.65m MT, with consensus expecting higher palm oil production in the next few months. While signs of demand have been rather mixed this year from key markets China, India and Europe, exports in May increased 17% MoM to 1.51m MT, driven by higher demand from India and Pakistan, albeit likely seasonal due to the celebration of Ramadan.

That said, palm oil futures have declined ~5% over the past month, and OCBC Treasury Research believes a slowdown in palm oil demand coupled with high palm oil supplies may cap prices to their yearend forecast of MYR2,650/MT.

Few Catalysts

With the above in mind, for the nearer term, catalysts are few and we believe the stock is still sensitive to CPO price movements. Hence we are keeping our HOLD rating and FV estimate of S$0.38.

Source: OCBC Research - 20 Jun 2017