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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Golden Agri-Resources Limited - world’s second largest oil palm plantation

Golden Agri-Resources Limited (“GAR”) is the world’s second largest oil palm plantation company with a total planted area of over 400,000 hectares located in Indonesia. Initiate coverage with a BUY at fair value estimate of S$0.53.

One of the purest upstream play. Approximately 98% of GAR’s profits are derived from its plantation division. We are bullish on palm oil prices given the positive industry dynamics and believe that GAR is well-positioned to benefit from the high CPO prices.

Above industry FFB yield. GAR’s current FFB yield of 22.4 tons per hectare is above the industry average. This is done through optimal fertilizer application, field management techniques, oil palm breeding and selection, as well as research to cultivate seedlings with superior characteristics.

Sizeable market shares in Indonesia for branded edible oil products. Filma and Kunci Mas, GAR’s two leading brands of cooking oil in Indonesia have captured a significant market share of over 16% in the branded edible oil category.

We are bullish on the palm oil industry on the back of 1) strong consumption demand from emerging countries; 2) tight soybean supply; 3) falling CPO production and inventory level and 4) likely occurrence of El Nino. We believe GAR is a beneficiary of high crude palm oil prices and it is a good proxy to CPO. We initiate coverage with a BUY at a fair value estimate of S$0.53, which represents a 15% upside from its last traded price of S$0.465.

Golden Agri-Resources Ltd - Rights issue to fund future growth

Golden Agri has proposed a fully underwritten 17-for-100 rights issue with free detachable warrants at S$0.18/share. We are not surprised as Golden Agri flagged to the market two weeks ago that it was mulling a rights issue. What was new were the two free detachable warrants for every five rights shares subscribed which would be EPS-dilutive if and when the warrants are in-the-money. We estimate that the rights will dilute our FY10 EPS forecast for Golden Agri by 12%. Following the removal of uncertainties surrounding this, we have returned our forward P/E target to 12x from 11x. Factoring this in and the dilution from the rights issue, we arrive at a post-rights target price of S$0.37. Our new cum-rights target price is S$0.41, up from our previous target of S$0.39. Maintain Neutral as the group's attractive valuations relative to regional peers are offset by a potential share overhang from the rights issue.

Golden Agri-Resources announces 17-for-100 rights with free warrants

Golden Agri-Resources Ltd (“GAR” or the “Group”) is proposing to carry out an underwritten renounceable rights issue (“Rights Issue”). The Rights Issue price is 18 Singapore cents per share, on the basis of 17 rights shares for every one hundred existing shares outstanding and two free detachable warrants for every five rights shares subscribed (“Warrants”). The Warrants, which have a 3-year maturity date, are exercisable at maturity at an exercise price of 54 Singapore cents per share and at a conversion ratio of one warrant to one share. GAR’s closing share price on 26 May 2009 was 45 Singapore cents.

The Rights Issue is expected to raise funds of approximately S$311.1 million, while the Warrants proceeds are expected to be approximately S$381.0 million, assuming all warrants are exercised.

The proposed Rights Issue has been initiated by GAR from a position of strength. It is forward looking and intended to provide the Group with the capital and financial flexibility to expand organically as well as undertake any external acquisition opportunities as and when these arise. The issue of Warrants will reward subscribing shareholders, maintain good long-term relationships with shareholders, and also provide GAR with additional future liquidity if exercised at maturity.

To demonstrate their commitment to the Group, Massingham International Ltd and Flambo International Limited, together with their respective nominees and custodians, which directly hold in aggregate 48.59% of GAR’s issued share capital, have undertaken that they will fully subscribe for their respective entitlements under the Rights Issue. The balance of the rights shares are underwritten by the Joint Lead Managers and Joint Underwriters: BNP Paribas, Singapore Branch; Credit Suisse (Singapore) Limited; and UBS AG, acting through its business division, UBS Investment Bank.

Group Chief Executive Officer, Franky O. Widjaja stated, “The proposed Rights Issue is a part of our growth strategy. It will provide capital to promote sustained growth, allow us to take advantage of value-creating expansion opportunities, proactively strengthen our balance sheet and provide financial flexibility. Ultimately, our aim is to maximise returns to shareholders over the long-term.”

Mr Widjaja further highlighted, “The proposed Rights Issue will strengthen our competitive position and prepare us for potential acquisition opportunities when they arise. These efforts will form the foundation of Golden Agri’s continued growth and profitability well into the future.”

Golden Agri-Resources - Most negatives reflected

Most negative news reflected. Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around S$0.29-0.30, where we believe that the current share price should have captured most, if not all, of the negative news. In fact, we are starting to see some signs of stability in both crude oil prices as well as CPO prices. Although industry experts at the recently concluded 20th Palm and Lauric Oils Conference/Exhibition 2009 in Kuala Lumpur expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. However, even at the bottom of this range, which is around US$416/ton, we still expect GAR to remain profitable as its cost of production is less than US$250/ton.

Worst may be over. Although there is still some uncertainty about the global economy, we believe that the worst may be over. For one, we continue to see pretty inelastic demand for CPO as cooking oil - a basic necessity. And should there be a prolonged economic slump, we may even see an increase in demand for CPO as a cheaper substitute by both consumers and even companies. Meanwhile, we also expect GAR to benefit from the easing fertiliser prices, which we understand have fallen by some 30% from the peak in 2H08, although we expect the bulk of the impact to come in 2Q09. And even if CPO prices stagnate around here (our assumption is US$500/ton), GAR's revenue should still get a boost from the expected 7- 10% increase in production. Finally, GAR has also put in measures - both operationally and fiscally - to prepare for what it sees as a challenging year. Key among these will be more prudent spending - GAR expects to cap its capex to US$200m, down from US$244m in FY08.

Re-rating of plantation stocks. In the recent run-up in the market, most plantation stocks have also been re-rated, as investors cautiously shift towards early-cycle recovery plays such as commodities. Based on yesterday's closing prices, we note that the sector average is now hovering around 8.9x FY09F EPS. As such, we will also raise our valuation multiple from a very conservative 6x to 8x FY09F EPS, which in turn bumps up our fair value estimate from S$0.29 (adjusted for the recent bonus issue) to S$0.40. Given the 40% upside potential, we also raise our rating from Hold to BUY.

Golden Agri - Hit by slipping CPO prices

Golden Agri will suffer a 63% yoy drop in core EPS in 2009 from our weak CPO price expectations. We expect CPO prices to drop a further 14% to US$500/tonne (down 42% yoy) as a result of palm oil supply outgrowing demand. At 13x FY10CL and EV/ha of US$6,200, Golden Agri is expensive relative to its peers. Based on its historical correlation with CPO prices, GGR is trading at a slight discount, which is where we expect it to stay in the near-term with less speculative money in the market. SELL.

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.

Golden Agri-Resources Ltd: Still no near-term catalyst

Muted CPO outlook. Golden Agri-Resources (GAR), after the recent correction from a high of S$0.34 in early Feb, has been languishing around current levels, mainly due to the lack of short-term catalysts. Being one of the largest palm oil plantation owners around, GAR is more susceptible to fluctuations in crude palm oil (CPO) prices (Exhibit 1). And in the near to medium term, there is likely limited upside for CPO prices, as industry experts expect CPO to trade within a narrow range of MYR1500-2100/ton in 2H09. At the recently concluded 20th Palm and Lauric Oils Conference/ Exhibition 2009 in Kuala Lumpur, these industry experts believe the pressure on CPO prices will come from an increase in output, weaker soybean oil prices and declining demand from countries such as China and India due to the global economic slowdown.

No boost from crude oil. Meanwhile, we also do not expect CPO prices to get any boost from crude oil prices, which are not expected to show any strong recovery due to the still weakening global economy. Although crude oil prices appear to have stabilised around US$40-50/barrel, we note it was mainly due to a cut in supply, rather than a pick up in demand. In any case, CPO prices have actually risen back above crude oil on a per barrel comparison (Exhibit 2). While this shows that there is still underlying support for CPO prices, due to demand as cooking oil, the flip side is that CPO is not cost viable as a fuel replacement without hefty subsidies.

Worst may be over. But 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. And even if CPO prices stagnate (our assumption is US$500/ton), GAR's revenue should still get a boost from the expected 7-10% increase in production. Finally, GAR has also put in measures - both operationally and fiscally - to prepare for what it sees as a challenging year. Key among these will be more prudent spending - GAR expects to cap its capex to US$200m.

Maintain HOLD. Although we do not see any near-term catalysts, we believe that most, if not all, of the negatives have been priced in. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would still be buyers closer to S$0.25.

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.