• CPO may average RM2400/MT in 4Q
• Potential trading opportunities
• Ageing plantations over longer term

Up 30% YTD After Tough 2017-2018

After a 40% fall from early 2017 to end 2018, the share price of Golden-Agri Resources (GAR) is up about 30% YTD. Crude palm oil stocks (CPO) have also seen more interest and better price performance in the past few trading sessions – month to date, GAR is up 12.5%, First Resources is up 9.3%, while Wilmar (has palm oil exposure as well) is up 5.4%.

Expecting CPO Prices to Close the Year Higher

In our sector report today, “CPO recovery” we have touched on the possible drivers behind the recent CPO price rise, such as 1) recent comments from a senior Indonesian minister, and 2) likely lower Malaysian CPO inventories for Mar.

Looking ahead, OCBC Treasury Research and Strategy are forecasting crude palm oil to average RM2,300/MT in 3Q19 and RM2,400/MT in 4Q19. This would mean a ~13% upside from current levels to 4Q19, and are likely to support CPO related stocks as well.

However do note that CPO prices are historically volatile and subjected to factors such as weather (which impacts supply), politics (EU and Indonesia, Malaysia), regulatory policies (e.g. Indonesia’s and Malaysia’s mandatory use of diesel containing locally produced biofuel), amongst others.

GGR’s P/B Now Close to +1 S.d Level

In terms of valuations, however, we note that GAR’s stock is currently trading close to the +1 s.d level over the past five years, while CPO prices are at the -1 s.d level.

As we expect CPO prices to recover and average RM2,400/MT in 4Q19, based on 0.65x P/B (slightly higher than 5-year historical average of 0.61x), we derive a fair value estimate of S$0.29 for GAR. Positive sentiment on CPO prices could support GAR’s stock, though investors are advised to be nimble when trading. Over the longer term, the group’s ageing plantations may still weigh on the minds of fundamental investors, as well as uncertainties relating to palm oil demand from the EU. Maintain HOLD.

Source: OCBC Research - 9 Apr 2019