Golden Agri-Resources - OCBC Investment 2018-09-26: Waiting For Better News

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GOLDEN AGRI-RESOURCES LTD SGX:E5H

Golden Agri-Resources - Waiting For Better News

• El Nino to affect supply?
• CPO prices still weak currently.
• Weak IDR as well.

Monitoring weather conditions which may affect overall supply

• According to the US National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center, there is a 50-55% chance of an El Nino onset during the Northern Hemisphere fall 2018 (Sep-Nov), increasing to 65-70% during winter 2018-19. Should weather conditions turn severe, it could have a negative impact on total palm oil production subsequently.
• A decrease in overall supply would increase prices, should demand stay the same.

CPO prices remain weak

• However, despite the impending El Nino weather conditions, crude palm oil prices have failed to rally. According to OCBC Treasury Research and Strategy, the prognosis over palm oil demand remains soft to-date; the recent contraction in palm oil demand in both EU and India are likely to persist for the rest of this year.
• In India’s case, an uptick in import tax has increased the cost of imported palm oil to buyers. Recall that India in the earlier part of this year raised import duties on crude palm oil from 30% to 44%.
• In the EU, there is a shift away from non-sustainable palm oil sources with the European Sustainable Palm Oil project which aims to achieve 100% imports from sustainable palm oil sources by 2020.

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Outlook remains dim for now

• For Golden-Agri Resources, though production is expected to increase for the rest of this year, palm oil prices remain weak. Over the longer term, we would also monitor the group’s replanting programme with its ageing plantations.
• Another reason that could have contributed to the Golden-Agri's share price weakness so far is likely the depreciation of the IDR, which we also highlighted in our earlier reports. Golden-Agri had sustained foreign exchange loss of US$22.2m in 2Q18 with the depreciation of the IDR against the USD.
• Meanwhile, with weak CPO prices, we lower our P/E from 17.5x to 16x FY19F earnings and as such our fair value drops from S$0.26 to S$0.24.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2018-09-26

SGX Stock Analyst Report HOLD Maintain HOLD 0.24 Down 0.260