Golden Agri-Resources Ltd - Potentially more positive surprises (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.67

Fair Value: S$0.80

Still positive on GAR. Golden Agri-Resources (GAR), which recently put out another strong set of results in 2Q11, could continue to post positive earnings surprises in 3Q11, buoyed by still resilient crude palm oil (CPO) prices, the fairly inelastic demand for CPO, and an expected rise in CPO production in 2H11.

CPO prices remain resilient. Despite the increased uncertainty over the global economies, CPO prices have remained largely resilient, with prices averaging around US$1012/ton in Aug. While the average CPO price did ease around 2.3% MoM in Aug, it was nowhere near the corresponding 5.6% slide in crude oil prices. We further note that the current futures price of US$995/ton (for delivery in Dec) is still above our base CPO assumption of US$980/ton for the whole of 2011.

Relatively inelastic demand for CPO. We believe that there are several reasons behind the relatively resilience of CPO prices and the key among them is that the demand for CPO is largely inelastic as it is still mainly used as a food source; it is also relatively inexpensive compared to other vegetable oils, thus making it more attractive to consumers and even industries in the current inflationary environment.

Expect continued improvement in CPO production. On the operations front, 2Q11 CPO production saw a decent 8% QoQ increase to 650k tons; palm product yield also improved further to 1.5 tons/ha from 1.4 tons in 1Q11 and 1.0 ton in 2Q10. For that quarter, GAR achieved ASP of US$1137/ton, though down slightly from US$1150 in 1Q11. Meanwhile, cash cost also crept up to US$291/ton in 2Q11 (versus US$260 in 1Q11) due to the appreciating IDR against the USD; GAR also used 40% more fertilizer in 2Q11 following a wet 1Q11. Barring any adverse weather conditions, GAR believes it should be able to achieve >10% increase in CPO production for 2011.

Maintain BUY with S$0.80 fair value. As we had just adjusted our numbers (including our base CPO assumption) after its robust 2Q11 results in mid-Aug, we do not see the need to do so at this juncture. Applying the same 12.5x peg to our blended FY11/FY12F EPS, our fair value remains at S$0.80. Maintain BUY. Key risks to our estimates include a sharp weakening of the USD, a collapse of crude oil prices, and of course, severe drop in CPO demand from both China and India.