Golden Agri-Resources Ltd: Hard Done By The Falling CPO Prices

Summary:

Golden Agri-Resources (GAR), one of the world’s largest oil palm planters and key producers of CPO, saw its share price tumble 48% in September alone, following the meltdown in crude oil prices and crude palm oil (CPO) prices.

On top of falling CPO prices, the plantation sector was also hit by reports of a growing CPO inventory amidst a slowing global economy.

On the flip side, lower CPO prices may lead to an increased demand for palm oil – already the cheapest vegetable cooking oil – in the current high inflation environment, especially from more price sensitive economies such as China and India .

In addition, with CPO futures easing to around US$650/ton, palm oil is fast becoming economically viable as a bio-fuel (assuming crude stays around US$90/barrel) , even without any government subsidies, and that should help absorb the growing supply.

Nevertheless, we are easing our CPO assumption to US$600/ton as the base case for FY09, which lowers our estimates by some 7-26%.

Applying a conservative 9x valuation to blended FY08/09F EPS, our new fair value is S$0.48 (vs. S$0.71 previously), which still represents >45% upside.

As we see longer term value, we retain our BUY rating.



See also:

Singapore Market - Sentiments Likely To Improve