Golden Agri - RHB Invest 2015-10-21: CPO Price Upgraded On Strong El Nino

Golden Agri - RHB Invest 2015-10-21: CPO Price Upgraded On Strong El Nino GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri - CPO Price Upgraded On Strong El Nino

  • We believe El Nino’s impact on edible oil supply will be one of the largest ever, given its current strength, and as such are raising our CPO price estimates to MYR2,700/tonne for 2016 (from MYR2,500). 
  • We keep our BUY on Golden Agri, as it remains a good proxy to the rising palm oil price and is the most liquid of the plantation stocks under our coverage. 
  • We reduce our TP slightly to SGD0.46, on 19x 2016 earnings. 


 Unprecedented impact. 

  • We believe El Nino’s impact on edible oil supply will be its biggest ever – given its strength and high global reliance on palm oil. In the last mild El Nino in 2009-2010, the palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match the 1997-1998 El Nino, the impact on production will be more severe, with Indonesia potentially experiencing a decline in production in 2016. 
  • Unlike the last two episodes, there will be little or no mitigating factor from an increase in oil palm hectarage, as Indonesia’s new planting has been slowing over the past few years. 

 Production expectation. 

  • For 2016, we lower production growth to 3% (from 7%) to build in conservatism due to drought impact. For 2017, we have factored in a 5% production growth as drought impact eases. 

 Earnings revision. 

  • We are raising our 2016 average CPO price assumption to MYR2,700/tonne from MYR2,500/tonne previously, while we lift the 2017 average to MYR2,750/tonne (vs MYR2,600/tonne). 
  • Nevertheless, we cut our FY16F earnings by 19.9%, as we factor in a 3.7% cut in production and lower effective palm oil price, due to the upward adjustment in USD/MYR rate to 4.30. 

 CPO price sensitivity. 

  • A MYR100/tonne increase in CPO price will raise Golden Agri’s (GGR) earnings by 7.1% and 6.1% respectively. Despite its increasing downstream presence, earnings remain leveraged to the palm oil price. 

 Maintain BUY, with SGD0.46 TP (from SGD0.48). 

  • We expect the CPO price to rally throughout 2016, resulting in an expansion in P/E multiple. As such, we have raised our target P/E for GGR to 19x (vs 16x).


Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-10-21
RHB Research SGX Stock Analyst Report BUY Maintain BUY 0.46 Down 0.48


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