Global Palm Resources Holdings Ltd - Slow expansion likely to continue (OCBC)

Maintain HOLD

Current Price: S$0.23

Fair Value: S$0.21

Decent 2Q11 results. Global Palm Resources (GPR) put in a pretty decent 2Q11 showing recently, in line with our expectations. Revenue jumped 61% YoY to IDR86.6b, underpinned by improved harvest (both from its own plantation and higher volumes purchased from third party) and buoyant selling prices of CPO and palm kernel; GPR achieved an ASP of IDR7586/kg, versus IDR6455 in 2Q10, but lower than IDR7706 in 1Q11. As a result, net profit also surged 111.5x YoY to IDR19.8b; it was also up 33% QoQ. For the first half, revenue grew 46% to IDR175.0b, meeting 49.3% of our FY11 forecast, while net profit climbed 206% to IDR34.7b, meeting 59.8% of our original full-year estimate (we will be bumping it up by 5.5%).

Strong rise in production volumes. On the operations front, CPO production climbed 25% QoQ to hit 13,285 tons, as the trees continue to recover from the impact of the tree stress last year. Yields are also continuing to improve as well, with FFB yield at 3.8 ton/ha, up from 3.2 ton in 1Q11. Efficiencies are also better, with CPO extraction rate rising further to 22.0%, up from 21.7% in 1Q11. However, we note that because GPR only sold 10,005 tons of CPO in 2Q11, it may be sitting on an excess inventory of 3,280 tons; this could also explain why its inventory shot up to IDR44.7b as of end Jun versus IDR21.3b as of end Dec last year.

Expansion again very modest in 2Q11. GPR added another 239 ha of new planting, adding to the 205 ha of new planting in 1Q11, and this brings its total planted area to 12,673 ha (81% are mature trees). But given management's plan is to plant 1.6-1.7k ha this year out of its existing 3850 ha land bank, we note that 1H11's new plantings of 445 ha only made up 27% of its target, suggesting that GPR has to aggressively step up its planting efforts or risk not meeting its target. Meanwhile, GPR revealed that it is in talks to potentially acquire some small brown-field plantations owned by foreigners in Sumatra. But we understand that these plantations are typically not well-run with mostly young trees; instead GRP seems to be more interested in acquiring their land.

Cutting fair value to S$0.21. Given that the slow pace of expansion is likely to continue for the foreseeable future, implying very limited earnings growth potential, we cut our valuation peg from 16x FY11F EPS to 10x blended FY11/FY12F EPS, which in turn drops our fair value to S$0.21 (S$0.325 previously). Maintain HOLD.