- Revising up our average CPO prices for 2011 to US$900/MT from US$800/MT. We assume CPO prices to trade at an average price of US$850/MT for 2012 and 2013
- We expect full year CPO production for the group to decrease marginally by ~5.8% due to bad weather conditions. However earnings expected to come in stronger as compared to last year given high CPO prices in FY10
- Gross margin for 4Q10 expected to increase m-m due to higher CPO prices in the quarter. However even with our upward revision of CPO prices, our valuation model indicates that GGR is fairly valued, and hence we maintain our Hold recommendation on the stock with a target price of S$0.74
Due to the persistent bad weather conditions (i.e. El Nino dry spells followed by excessive rainfalls due to La Nina), crude palm oil supply is expected to remain tight at least into the first quarter of 2011. CPO prices have remained high mainly due to the shortfall in supply. Inventory levels may also potentially be lowered given palm oil low yielding production cycle through April. We also note another imminent demand factor coming in play with crude oil prices hovering around US$90/bbl, which prompts biodiesel production. And any further increase in crude oil prices will give us a more bullish outlook for CPO prices, given the existing tightness in its supply.
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