Golden Agri-Resources - RHB Invest 2020-11-02: Increasing CPO Prices; Keep SELL

GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Golden Agri-Resources - Increasing CPO Prices; Keep SELL

We raise our CPO price assumptions for 2020/2021 to reflect slightly higher y-o-y prices of MYR2,650/tonne in 2021 from MYR2,600/tonne in 2020.
Golden Agri Resources (SGX:E5H)’s valuations remain prohibitive, trading at > 30x 2021F P/E. Keep SELL and S$0.13 target price, 7% downside.

CPO prices have been very volatile of late, racing past the MYR3,000/tonne mark, falling back below, and – subsequently – swinging up and down by MYR50.00-100.00/tonne on a daily basis. Besides the usual supply and demand dynamics, we believe there are three major swing factors that could determine the CPO price direction in 2020: Soybean prices (which ties in with weather issues), crude oil prices (which ties in with COVID-19), and labour issues in Malaysia.

Overall, based on latest Oil World and US Department of Agriculture forecasts, 2021 supply and demand dynamics are set to be relatively balanced – assuming production returns to relative normalcy while demand recovers gradually post COVID-19.
Based on the latest Oil World numbers, both the 17 oils & fats and eight vegetable oil complex are expected to see stock/usage ratio declines in 2021, while the 10 oilseed complex is expected to post a slight increase on bumper soybean crops anticipated from the US.
For CPO, the 2021 stock usage ratio is also expected to decline, while SBO’s ratio is anticipated to be flat y-o-y. With lower stock/usage ratios – particularly for CPO, which is likely to fall to below historical average levels of 17.5% – this likely indicates 2021 CPO prices should remain supported at above MYR2,500/tonne.

Our base case assumptions for our CPO price view are that:
1. La Nina will not worsen and soybean crops will not be significantly affected in the US and South America. This means that soybean prices may see some correction, leading to CPO prices also correcting somewhat in the near term;
2. COVID-19 will be relatively contained in 2021, and our higher crude oil price assumptions will hold for 2021. This would mean that the biodiesel mandate in Indonesia will be adhered to, at least until Oct 2021; and
3. the labour shortage will not be too intense in Malaysia in 2021 (assuming the Government makes some changes to its foreign labour policy) and we expect productivity to improve as per Oil World’s forecast in Malaysia and Indonesia.

We raise our CPO price assumptions to MYR2,600/tonne for 2020 from MYR2,400 and MYR2,650/tonne for 2021 from MYR2,500.
We also update our latest in-house currency forecasts. Our earning forecasts have been raised by 10-39% for FY20-21 and minimally changed for FY22.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-02

SGX Stock Analyst Report SELL MAINTAIN SELL 0.130 SAME 0.130