An unfavourable supply-demand balance is likely to bring average selling prices of CPO down another 14% to US$500/tonne (down 42% yoy). We expect palm-oil supply to increase 4-5% in 2009-10 driven by the aggressive planting programmes that took place over the past 2-3 years. Demand for palm oil is only expected to grow 3-4% due to slowing global GDP growth and a significant drop in biodiesel demand. After the recent decoupling between palm and crude oil, we see little that will drive CPO prices in the near term.
As the second largest global palm oil plantation with more than 90% of its profits coming from its palm oil plantations, Golden Agri is one of the most highly sensitive companies to CPO price changes. Based on our US$500/tonne CPO estimate, Golden Agri’s core profits will drop by 63% in 2009 as it deals with high production costs. If CPO prices are 10% higher than our estimate, our net profits expectations would be rise by 26%.
At 13x FY10CL PE and EV/ha of US$6,200, Golden Agri is trading at a premium relative to its Indonesian peers. This is not justified given the corporate governance risks from the company’s connection to the Widjaja’s family. Our DCF-derived target price of S$0.21/share implies 28% downside.
We did a detailed regression analysis of GGR’s stock price to CPO prices after numerous questions from investors. The 6 year correlation between Golden Agri’s stock price and CPO prices is very high with an R-Square of 0.92. During boom years, the stock has historically traded at a premium to where it should be based on the regression whereas it has traded at a discount in bear markets. With less speculative money in the market, Golden Agri deserves to trade at the current discount it is at and will remain there for a while.
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