Golden Agri-Resources Ltd: Prudent strategy for 2009

FY08 results slightly disappointing. Golden Agri-Resources (GAR) saw its FY08 revenue rise 59.4% to US$2985.9m (8.6% > our estimate), and while core net profit (excluding bio-asset fair value gains) rose 32.0% to US$376.8m (11% < our full-year figure). GAR did not declare a final dividend (versus 0.5 S cent in 2007) in an effort to conserve cash in these uncertain times. Instead, it plans to reward shareholders with a bonus issue (1 bonus share for every 25 shares held), and it will capitalise US$10.0m to its share premium account. According to management, the bonus issue works out to an equivalent cash dividend of 1.0 S cents/share, assuming investors can sell the bonus shares at S$0.25 each.

Prudence rules in 2009. Going forward, GAR expects the operating environment to remain challenging in 2009, given the still uncertain economic outlook and volatile commodity prices. And on its part, GAR will strive to manage its costs as well as focus its growth on the sale of various palm- based products to selected key regions in China. Other prudent measures include maintaining a strong balance sheet (net gearing just 0.09x) and careful spending. For 2009, GAR expects to cap its capex to US$200m (versus US$244m in 2008), where it will cautiously expand its oil palm plantations (includes building new mills) and add to its downstream processing/refining capacity to support its plantation operations.

Worst may be over. Meanwhile, we believe that the worst may be over. For one, GAR should benefit from the easing fertiliser prices, although we expect the bulk of the impact to come in 2Q09. Secondly, management believes that its CPO production should increase by around 7-10%, aided by its recent new planting as well as easing tree stress (typically lasts about two years). We have correspondingly raised our FY09 revenue estimate by 4.3%. Although CPO prices have been pretty stable around the current levels for some time now and CPO demand has remained fairly stable, we note that the biggest price influence is actually weather and its impact on all the edible oil crops - is probably the hardest to predict.

Maintain HOLD. So barring a strong recovery in crude oil prices and the global economy, we see no pressing need to raise our conservative US$500/ ton CPO assumption yet. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would turn buyers closer to S$0.20.

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