Guiding for 5'10% production growth. Amidst other plantation companies' guidance of weaker yields this year due to tree stress, Golden Agri is guiding for a 5'10% production growth this year. Management believes its trees are in good shape and not stressed out as its yield during the peak production in 3Q last year was not very high. Its production during seasonal peaks has been declining for the last 2 years as the newly mature areas came into production. Considering that Astra Agro Lestari's (AALI, Neutral, FV IDR22,939) production growth came in at 4.3% in the first 5 months of this year and picked up steam in May, Golden Agri's guidance does not seem far-fetched as the company has younger trees than AALI. We have factored in a conservative 5% production growth in our earnings forecast, which implies that there is room for upgrade.

New planting progress. Management remains optimistic that its new planting target of 20k ha this year is achievable despite having achieved only 1,700 ha in 1Q. Compared to 2011, during which the company managed to complete 1,100 ha in 1Q, the new planting for this year certainly showed an improvement. Management believes that new planting will pick up pace in the subsequent quarters. In 2011, half of the new planting took place in 4Q alone. Golden Agri has 100k ha of landbank with licence for planting. However, about 5% were found to be of high conservation value and will need to be conserved. This still leaves sufficient landbank to sustain 5 years of new planting.

Proxy to palm oil play. Of the big 4 listed plantation companies, Golden Agri is the purest palm oil stock given that other players such as Wilmar, Sime Darby and IOI Corp have sizeable non-palm oil businesses. This, together with the stock's high liquidity, makes its stock price highly sensitive to palm oil price movements. We believe that palm oil price has bottomed largely due to Malaysia's weak production this year, which could be exacerbated by the recent dry weather.

Valuations. Golden Agri is trading at around 10x forward PER. Considering its strength and scale of operations, we find the stock inexpensive, especially in comparison with Malaysia's large cap plantation stocks.

Source: OSK