Golden Agri Resources

Golden Agri Resources (GAR): OCBC downgrades to HOLD as CPO prices turn lower again where the front month futures contract has just hit MYR2170/ton, probably the lowest level since Oct 2009, amid concerns that stockpiles (both CPO and soy) are expanding to record levels as production continues to climb even as global demand (especially out of China and India) remains weak. More worrying, market watchers expect to see further softening in CPO prices on supply concerns, given that production of CPO tends to improve in the second half of the year. Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. Hence, further weakness in CPO prices could also lead to downside risk for GAR, both in terms of profitability and share price. Despite the brief spike in CPO price in 2Q, OCBC note that the average CPO price has actually come off some 5% from 1Q, suggesting that its performance is likely to be quite muted. At the topline, OCBC are expecting around US$1.28b (down 6% q/q) and a core net profit of US$100.7m (down 11%). OCBC downgrades Golden Agri to HOLD with TP of $0.57. On the flipside, CS maintains its OUTPERFORM rating (TP of $0.67) on GAR, although cutting FY13e and FY14e earnings by 22% and 15% respectively. GGR remains one of the most leveraged plantation companies to palm oil prices—for every RM100/t decrease in palm oil prices, its earnings would fall by 8%. Therefore, it works both ways—when palm oil prices eventually improve, GGR's share price should be quick to react positively. In 2013, GGR profits are expected to be hit on all fronts: (1) Weaker palm oil prices should result in a much weaker profit contribution YoY; (2) Refining margins in Indonesia should be further eroded, as numerous new refining capacities in Indonesia kick in; and (3) Crush margins in China remain depressed and the operating environment remains difficult due to overcapacity.