Golden Agri - Stock looks inexpensive, with the lowest PEG ratio in the sector at 0.44x

We have increased our CPO price forecasts due to the El Nino effect. This has a direct bearing on our forecast earnings. We expect Golden Agri’s productivity to rise in FY09-11, as its hectarage matures. Overall, the impact of El Nino should reduce its CPO yield in FY09F to 4.9 tonnes per hectare, from 5.2 tonnes in FY08. However, we expect a marked recovery in FY10 and FY11, to 5.34 tonnes and 5.43 tonnes per hectare, respectively. The amount of mature hectarage should also rise from 247,000 hectares in FY09F to 274,000 in FY11F.

Golden Agri’s balance sheet is unleveraged, in our view. The company raised S$692m (US$423m) in a recent rights and warrant issue, which is to be used to increase planted area by 50,000 hectares per annum over the next three years. We expect the already relatively low (vs peers) net gearing to fall steadily from 9% in FY08 to -5% in FY11. We expect the company to have US$782m in cash in FY09, despite its US$120m capex programme. This offers the capacity to acquire plantation assets, should the opportunity arise. Although the acquisition profile has not been detailed, Golden Agri has the resources to increase its footprint in regional plantations.

We now forecast a 2% decline in net earnings in FY09, but a 12% increase in FY10 and a 25% increase in FY11. EPS is diluted by the recent rights and warrant issue: Golden Agri completed a 17 for 100 shares rights issue in July. Investors also received two warrants for every rights share. Therefore, we increase our invested capital growth and operating margin forecasts in phase 2 of our DCF valuation. Our target price rises to 60 cents, implying 25% upside potential and a Buy rating. The stock looks inexpensive at 17x FY09F earnings and a PEG ratio of 0.44x.

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