Golden Agri-Resources - OCBC Investment 2017-06-20: Positive Long Term Initiative

Golden Agri-Resources - OCBC Investment 2017-06-20: Positive Long Term Initiative GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources - Positive Long Term Initiative

  • New seeds to sustain production growth.
  • Eyes on CPO demand in 2H.
  • CPO price upside likely capped.

New high-yielding material positive for the longer term 

  • In line with efforts to increase productivity, Golden Agri-Resources’ subsidiary PT SMART Tbk now has two clones of high-yielding oil palm planting material that is approved for use by Indonesia’s Ministry of Agriculture. These planting materials (Eka 1 and Eka 2) are envisaged by the company to potentially increase yields to more than 10 tonnes of CPO/hectare/year at prime age under optimal weather and soil conditions, which is a contrast to Indonesia’s industry average yield of below four tonnes/hectare/year. 
  • Over the next five years, the group will cultivate a sufficient quantity to plant over a larger commercial area starting in 2022. This longer term development is particularly important, in view of their estates’ average age of ~16 years (including plasma), which is considered to be one of the oldest among plantation peers. 
  • Replanting activities with higher-yielding seeds are thus expected to remain a key focus to keep a favourable age profile and sustain production growth.

Entering peak CPO output period; cap on price upside 

  • A series of data was also recently released by Malaysian Palm Oil Board (MPOB). CPO production in May was up 21% YoY to 1.65m MT, with consensus expecting higher palm oil production in the next few months. 
  • While signs of demand have been rather mixed this year from key markets China, India and Europe, exports in May increased 17% MoM to 1.51m MT, driven by higher demand from India and Pakistan, albeit likely seasonal due to the celebration of Ramadan. That said, palm oil futures have declined ~5% over the past month, and OCBC Treasury Research believes a slowdown in palm oil demand coupled with high palm oil supplies may cap prices to their yearend forecast of MYR2,650/MT.

Few catalysts 

  • With the above in mind, for the nearer term, catalysts are few and we believe the stock is still sensitive to CPO price movements. 
  • Hence we are keeping our HOLD rating and Fair Value estimate of S$0.38.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2017-06-20
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.380 Same 0.380