Golden Agri-Resources Ltd: Weaker CPO prices factored in

Weighed by weaker CPO prices. Golden Agri-Resources (GAR) has seen its share price coming under some pressure of late, easing some 9.2% from its recent S$0.705 high; no doubt weighed by the decline in CPO (crude palm oil) prices, given that the group is one of the largest oil palm plantation owners in Indonesia. As a guide, we note that the average CPO price has fallen by around 6.7% to US$1137/ton in Mar, compared to the average of US$1218/ton in Jan and Feb. However, we note that if prices remain around current levels, it would still be 6.1% higher than the US$1071/ton average seen in 4Q10.

Have worked in lower CPO prices. In any case, we have already taken the impact of softening CPO prices into our assumptions, given that our base CPO price assumption remains at US$950/ton for the whole of this year. As before, we are expecting to see CPO prices remaining relatively firm for the first half year of this year before easing off after mid 2011 as supply conditions improve. As a recap, GAR has guided that it should be able to achieve a 5-10% increase in CPO production this year, provided that it does not suffer from any adverse weather conditions. Hence management also expects the higher output to mitigate the expected fall in CPO prices in 2H11 on its performance.

Support from rising crude oil prices. Meanwhile, we believe that any sharp tumble in CPO prices is unlikely, given the still rising crude oil prices, up around 9.6% at US$114/barrel in Mar from US$104 in Feb; this also driven by concerns that the growing unrest in the Middle East could crimp supply. And as these supply concerns are unlikely to be resolved in the near term, which will not only keep crude prices supported, but we also believe that it may drive demand for alternative sources of fuel, especially bio-diesel. Indeed, Malaysia - the world's second largest CPO producer - now plans to implement the use of B5 bio-diesel in four months, and has allocated MYR200m for the establishment of blending facilities; it will also remove the 10% sales tax on bio-diesel to help drive demand.

Maintain BUY with S$0.88 fair value. Short-term market volatility notwithstanding, we remain sanguine about the growing demand for CPO-based products from rapidly developing countries such as China, India and Indonesia over the medium term. Maintain BUY with S$0.88 fair value (17x FY11F core EPS).

Source