Golden Agri-Resources - RHB Invest 2020-01-20: Imputing Higher CPO Prices; Upgrade to BUY

GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Golden Agri-Resources - Imputing Higher CPO Prices; Upgrade to BUY

Upgrade to BUY from Neutral, new higher SOP-based Target Price, 15% upside with c.2% FY20F yield. See Golden Agri Resources Target Price.

After imputing higher CPO price assumptions, we lift GOLDEN AGRI-RESOURCES (SGX:E5H)’s FY20F earnings by > 100%, from a low base. As its share price has not reacted much to the recent CPO price hike, we believe it is time to relook at this laggard – since valuations for FY20F have come down to more reasonable levels.

CPO prices have risen sharply to > MYR3,000/tonne. While we had expected an improvement in prices towards the year’s end, the strength of the price rally caught us by surprise. We believe there could be a slight correction, as there could be some speculative elements at play currently.
Nevertheless, we expect 1H20 prices to remain high at a range of MYR2,700-3,100/tonne before seasonally weakening to a range of MYR2,400-2,700/tonne in 2H20.

Given this scenario, we are revising our CPO price forecasts up to MYR2,600/tonne for 2020 while leaving our 2021 forecasts intact at MYR2,500/tonne. This will imply a substantial 22% y-o-y increase in CPO prices from 2019’s average of MYR2,129/tonne. With this, plantation companies’ earnings are expected to re-rate upwards significantly, particularly as the leverage of CPO price change to earnings is much more significant than FFB output growth.
For the firms under our coverage, every MYR100/tonne change in CPO prices impacts earnings by between 4% and 18% pa. We expect to start to see the impact of strong CPO prices on earnings from the 4Q19 reporting period onwards, ie Feb 2020, which could trigger another round of share price retracements.
Despite the run-up in share prices, we believe there is still upside for some stocks, as our sensitivity analysis indicates that most of our stock picks are still reflecting CPO prices of c.MYR2,400-2,500/tonne.

We continue to remain positive on sector fundamentals and believe there are three key factors that will keep CPO prices high in 2020:
- A CPO deficit is imminent in 2020, as demand growth outstrips supply growth and stock/usage ratios fall below historical averages;
- Biodiesel – the largest demand catalyst – is still very much a “GO” in Indonesia and Malaysia;
- Food demand should remain strong from China and India.
See Golden Agri Resources Share Price; Golden Agri Resources Analyst Reports.

We apply an unchanged EV/ha of USD5,500/ha for Golden Agri’s plantation assets and target P/E of 15x FY20F for its downstream division. See Golden Agri Resources Target Price. This is at the lower end of its peers’ USD6,000-14,000/ha range – 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 | https://www.rhbinvest.com.sg/ 2020-01-20

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