Golden Agri-Resources
Oct 26 close: S$0.68
OCBC Investment Research, Oct 26

GOLDEN Agri-Resources (GAR) is likely to see a pretty decent Q3 FY10 performance, aided by the recovery in crude palm oil (CPO) prices in the latter half of the quarter as well as higher CPO output from its estates.

As a recap, CPO prices have recovered sharply from an average of US$791 a tonne in Q2 FY10 to around US$821 a tonne; and we may see further room for earnings upside in Q4 FY10 as well, given that CPO prices are now hovering around US$900 a tonne. However, we also note that some of the shine may be dulled by news of the Indonesian government's move to raise the export tax on CPO in October to 7.5 per cent from 6 per cent in September; and given the current firm CPO prices, we can expect more export tax hikes in the coming months.

Meanwhile, GAR and its subsidiary PT Smart announced that they have been in constructive dialogue with the Roundtable on Sustainable Palm Oil (RSPO); this since the RSPO raised its concerns in letters on Sept 21 on the matter of the companies' compliance towards the RSPO rules, including the code of conduct.

Recall that Greenpeace had earlier alleged that PT Smart has developed on high-carbon stock land (peat land and primary forests) and also destroyed natural habitats - resulting in PT Smart commissioning an independent verification. PT Smart and GAR intend to publish a joint statement to disclose their action plan to address the specific concerns raised by RSPO in the week of Oct 25.

Also recall that the Greenpeace report has earlier led Unilever (the world's largest buyer of CPO) and Nestle (the world's biggest food company) to drop Smart as their CPO supplier. While any financial impact is likely to be limited (these two companies made up less than 10 per cent of its FY09 revenue), the group would need time to rebuild its reputation; but we believe that the to-be-announced RSPO action plan is a good first step.

In view of the upbeat CPO outlook, we are raising our CPO assumptions for both FY10 and FY11 and we now expect prices to average around US$825 a tonne and US$860 a tonne respectively (versus US$800 a tonne previously). We also raise our earnings estimates for FY10 by 5.6 per cent and for FY11 by 14 per cent. As a result, our fair value improves to S$0.78 (16 times FY11 EPS) from S$0.655. Maintain 'buy'.