Golden Agri-Resources Ltd (OCBC)

Maintain BUY
Previous Rating: BUY
Current Price: S$0.665
Fair Value: S$0.96

Higher CPO output expected this year

Eyes >10% output growth. Golden Agri-Resources (GAR) was recently quoted by newswires as saying that its output of crude palm oil (CPO) could grow by >10% this year if weather conditions remain favourable. The group had earlier guided that it should be able to achieve a 5-10% increase in CPO production. As a recap, GAR's 1Q11 CPO production saw a smaller-than-usual dip of just 15.4% QoQ to 602.6k tons; palm product yield was 1.4 tons per ha, versus 1.5 tons in 4Q10 and 1.15 tons in 1Q10. Meanwhile, management was also quoted as saying that "there is continued tightness in supply, so whatever is produced by the sector in Indonesia and Malaysia is taken by the market", where China and India continue to be the group's core markets.

CPO prices continue to hold up for now. We note that this is supported by the current market demand-supply situation, given that CPO prices have been fairly stable, despite the recent volatility in crude oil prices. However, we believe that with the recent increase in CPO production in both Indonesia and Malaysia in May and with production expected to increase further in 2H11, CPO prices are likely to head south as well. Hence we continue to maintain our average CPO price forecast at US$950/ton for the whole of 2011; this suggests a potential downside of 6.1% from the current US$1012/ton. But we are not perturbed as the price decline would be more than offset by the expected production increase.

Planning for medium-term growth. Meanwhile, we note that GAR remains committed to medium-term growth, as it aims to expand its plantations by 20-30k ha per year in the next three years, mainly by cultivating its existing 100k ha land bank in Indonesia; it is also looking at the possibility of acquiring a few sites in Kalimantan with a minimum size of 10k ha each. We understand that GAR wi l l not rule out acquisitions (of complementary crops like rubber and sugar) if opportunities arise. It also plans to expand its downstream production capabilities in cooking oil, margarine and other specialty fats to shift product mix into higher value-added products.

Maintain BUY with S$0.96 fair value. GAR is turning towards Liberia for longer-term growth opportunities, where it cur rent ly has a concession to develop around 220k ha. According to management, it intends to start planting up to 15k ha next year, which should start to bear fruit in the next five years. Maintain BUY with S$0.96 fair value (based on 16x FY11F EPS).