Golden Agri: Nestle resumes CPO purchases (OCBC)

Nestle resumes CPO purchases. Golden Agri-Resources (GAR) recently announced that Nestle has placed an order to resume palm oil purchases from its subsidiary PT SMART. This after the food giant1 noted that SMART has managed to make continuous progress towards meeting Nestle's responsible sourcing guidelines, including full traceability across the supply chain as audited by international NGO, The Forest Trust (TFT). Recall in Mar 2010, Nestle ceased CPO purchases from SMART due to alleged draining of peat lands and violations of environmental laws. Further allegations by Greenpeace also led other consumer food giants such as Unilever and Burger King to suspend their palm oil purchases from the group.

Further orders depend on continuous progress. Going forward, Nestle adds that further business will depend on the group delivering continuous progress towards meeting the responsible sourcing guidelines and RSPO (Roundtable on Sustainable Palm Oil) certification. Nevertheless, the group says it views this order as an acknowledgement of its ongoing sustainability commitments and efforts to find solutions to continuously produce palm oil in a sustainable, environmentally and socially responsible manner. We also view the move positively as it means that the group's effort (undertaken in late 2010) to improve the sustainability of its CPO plantations has borne fruit and this news is a strong endorsement of its "green" progress.

Still looking to do more. And the group is not stopping there - GAR says it has also been working with TFT on the implementation of a Forest Conservation Policy, which aims to ensure that GAR has no deforestation footprint (including no development on high conservation value forest areas) and also seeks to achieve long-term sustainable growth for both GAR and the CPO industry. In addition to FCP, GAR is developing a Yield Improvement Policy to improve its productivity. After gaining entry into RSPO in Apr this year, GAR intends to secure RSPO certification for all its existing units (as of 30 Jun 2010) by end 2015; SMART has just gotten its certification on 16 Sep 2011 covering nearly 15k ha and one mill.

Maintain BUY with S$0.80 fair value. Meanwhile, we are maintaining our estimates for now, as we understand that Nestle probably contributed less than 0.5% of its FY09 sales. But further catalysts could come from the resumption of CPO purchases by other food giants such as Unilever. For now, we maintain our BUY rating and S$0.80 fair value. As before, key risks to our thesis include further weakening of the USD, a collapse of crude oil prices, and severe contraction in CPO demand from both China and India.