• CPO prices have trended lower
• Weakening IDR vs. USD
• Lacklustre CPO prices likely in 3Q

CPO Prices Continue to Trend Lower

1Q18 was a challenging period for the palm oil industry, and market watchers are concerned about a production surplus in 2H18, due to seasonality and low production in 1Q18. Crude palm oil (CPO) prices have continued to trend lower in 2Q18, and are down about 6% so far this quarter. As for Golden-Agri Resources (GAR), its share price is down about 16% from end Mar while the STI is down about 5% over the same period.

IDR Has Weakened Substantially in 2Q

On the currency front, we note that so far this year, the IDR has also depreciated by about 5.9% against the USD with most of the loss happening in 2Q18. GAR’s sales to customers within Indonesia and China are denominated in their local currencies, while export sales for most of the group’s products and cost of certain key purchases are quoted in USD.

Purchases and operating expenses in Indonesia and China are mainly denominated in their local currencies. This should be accretive operationally to earnings, but the group is also exposed to currency translation risk as financials are reported in USD.

Based on the annual report, if the IDR weakens against the USD by 5% with all other variables remaining constant, the group’s pre-tax profit would have decreased by US$34.7m in 2017 and US$30.9m in 2016, likely impacted by translation losses. Recall that pretax profit in FY17 and FY16 were US$114.1m and US$140.3m, respectively.

CPO Prices to Remain Lacklustre in 3Q

OCBC Treasury Research & Strategy (GT) continues to stay bearish over palm oil prices into 2H18. With supplies likely to go higher into 3Q18 amid lacklustre demand, the 3Q18 price outlook by GT remains at MYR2,250/MT with downside risks.

A recovery to the MYR2,400/MT level is forecasted into year-end as supplies dwindle then. Over the long term, however, GAR believes that CPO prices will be supported by growing food demand as well as from increasing biodiesel usage.

In the nearer term, with weaker CPO prices and a dimmer outlook on earnings, we lower our valuation to 17x FY19F earnings and our fair value estimate drops from S$0.34 to S$0.30.

Source: OCBC Research - 11 Jul 2018