Golden Agri-Resources - RHB Invest 2019-09-30: Now NEUTRAL Due To Sector Upgrade


Golden Agri-Resources - Now NEUTRAL Due To Sector Upgrade

  • Upgrade to NEUTRAL from Sell, new SOP-based Target Price of SGD0.25 from SGD0.22, 6% upside. This is on our sector upgrade to OVERWEIGHT, as we expect CPO prices to rerate upwards in 4Q19m, and continue rising in 1H20.
  • Plantation stocks will also likely rerate on the back of this price movement, as CPO prices are the leading indicator for plantations’ P/Es.

When CPO prices start moving, plantation companies’ P/Es will expand first

  • When CPO prices start moving, plantation companies’ P/Es will expand first, before earnings catch up and valuations return to normal. As such, we lift our target P/Es for the plantation stocks under our coverage by 3-5x to trade at 1SD above their historical averages. This is because we expect plantation stocks to trade at more inflated valuations in the short term, before earnings start improving.
  • We leave our CPO price assumptions unchanged at MYR2,200/tonne for 2019 and MYR2,400/tonne for 2020.
  • The main premises for our upgrade are:
    1. Trade war is still on, with import duties being levied on US soybeans;
    2. A CPO production slowdown is imminent in 2020, while inventories should normalise by 1Q20;
    3. Demand should remain strong from China, due to the continuing African swine flu epidemic in the country;
    4. The B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020;
    5. Crude oil prices will remain at relatively high levels, resulting in a positive CPO-gasoil price gap;
    6. Weather conditions remain normal.

Trade war continues to have far-reaching effects

  • The trade war continues to have far-reaching effects on the sector, not only on soybean demand and supply dynamics, but also on crude oil prices and FX volatilities. This, combined with the improving supply-demand dynamics of the CPO and eight vegetable oil complex, should lead to improved CPO prices in 2020.

Positioned for CPO price recovery.

  • We opine investors should position for the run-up in CPO prices that we expect to see within the next few months, as share prices should also react positively in tandem. In addition, we believe the market would need to look for stock ideas with positive earnings growth momentum during this period of uncertain global economic conditions.

Upgrade to NEUTRAL, with a higher SOP-based Target Price of SGD0.25 (from SGD0.22).

  • We apply an EV/ha of USD5,500/ha (from USD5,000) for GOLDEN AGRI-RESOURCES LTD (SGX:E5H)’s plantation assets and target P/E of 15x FY20F (12x) for its downstream division. This is at the lower end of its peers’ range of USD6,000-14,000/ha, which we believe is justified given its older age profile. The downstream target P/E of 15x is in line with its peers’ 12-15x.

Singapore Research RHB Securities Research | 2019-09-30
SGX Stock Analyst Report NEUTRAL UPGRADE SELL 0.25 UP 0.220