• After imputing our revised CPO prices assumptions, we cut our Golden Agri Resources (SGX:E5H)'s FY20F earnings by 55% and FY21F-22F by 15-16%.
• While the weakened CPO prices are partly buffered by Golden Agri’s downstream segment, valuation seems expensive vs peers – it is currently trading at a hefty 28x, even after its recent price retracement.

Our Worst Case Scenario for Demand Is Still a Possibility

• Our worst case scenario for demand is still a possibility if COVID-19 is not arrested by end 2020 and crude oil prices do not recover in 2H20 as projected by our in-house crude oil forecasts. Please refer to our report: Plantation - RHB Invest 2020-03-11: COVID-19 + Crude Oil = Correction for more details.
• Currently, at a palm oil and gasoil futures or POGO price gap of USD37.00/bbl, it would mean Indonesian biodiesel demand could be short 2.1m tonnes – instead of the 1.4m tonnes we originally projected. This could mean that the worst case scenario is for CPO stock/usage ratios to rise to 24.4% from 2019’s 18.6%. Based on historical guidelines, this implies CPO prices falling to between MYR2,000 and 2,200/tonne.

Our Current In-house Assumption Is for COVID-19 to be Under Control Within 1H20

• Nevertheless, our current in-house assumption is for COVID-19 to be under control within 1H20, which would mean our second scenario (Scenario2) is a more reasonable assumption to make. This assumes a 10% decline in demand from the EU, US, and China, as well as a 2.1m tonnes decline in biodiesel demand in Indonesia – a 3.8m tonnes decline in total CPO demand.
• With this, we estimate an increase in CPO stock/usage ratios to 20.1% from 18.6%. Based on historical data, CPO prices ranged between MYR2,200 and MYR2,400/tonne when stock/usage ratios were at these levels in 2011 and 2018.

Cutting Our CPO Price Forecasts to MYR2,400/tonne for 2020

• We are therefore cutting our CPO price forecasts to MYR2,400/tonne for 2020 from MYR2,600, while leaving our MYR2,500/tonne forecast for 2021 and 2022 intact.
• We have also adjusted our FX assumptions to be in line with our latest in-house assumptions. With this reduction in prices, we have cut the earnings forecast for FY20F-21F by 6-17%.

Downgrade to SELL

• We downgrade our call to SELL with a lower SOP-based Target Price of SGD0.125, with a decreased EV/ha of USD2,500 from USD5,000 for Golden Agri’s upstream division and an unchanged 15x 2020F P/E for its downstream business. This is lower than its peers, which are trading at USD5,000-12,000/ha, which we believe can be justified, given its older age profile.
• We highlight that Golden Agri Resources is highly sensitive to CPO price movements, where every MYR100.00/tonne impacts its earnings by 8-10%.

Source: RHB Invest Research - 24 Mar 2020