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Breakdown: 2013 To Be Tumultuous For Golden Agri?
Breakdown, Tradeable | 05 March 2013
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By: Simeon Ang
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Turmoil. Not particularly something companies look forward to. But being at the mercy of the commodities market, counters such as Golden Agri-Resources cannot help but try to ride the waves of a commodity ocean that is currently battling the effects of a hurricane. 2012 has proved to be quite an upset for crude palm oil commodity players especially after a very good 2011.

GAR’s Report Card Says It All
Golden Agri’s top line figures appeared to record a marginal gain of US$98.8 million or 1.7 percent from FY11 to FY12. However, behind the figures, GAR’s two main revenue contributors experienced starkly different scenarios. GAR’s agriculture business was hit by lower palm oil prices particularly in 4Q12. As can be seen in the chart below, FY12 average international prices of crude palm oil fell about 11 percent when compared with FY11. The lower crude palm oil prices in turn pushed contributions from that segment down, by 1.1 percent or by about US$51 million.

Source: Golden Agri performance presentation, graph on CPO prices versus GAR’s output and earnings

It was a different story over at GAR’s food business, in particular, operations in China. Revenue there soared over 13.1 percent as selling volumes of soybean meal and snack noodles grew. It is also important to note that these products also experienced higher selling prices than their counterparts in the agriculture business.

Below, we look at what analysts have to say for the prospects of Golden Agri and whether investors should consider buying at a time of possible weakness.

One of the operational highlights that management pointed to was the increased production of fresh fruit bunches (+13.8 percent) as well as palm products(+10.3 percent). However, Chan Ying Jian and Simone Yeoh of JP Morgan notes that production growth does not equate to sales growth. Ying Jian continues by saying,

“Already Golden Agri has been reporting increasing stockpiles over the past few quarters on weaker demand as well as logistical problems.”

With that, Ying Jian and Simone essentially point to the fact that production figures across the palm oil sector have been relatively healthy and growing. However, demand has not necessarily kept up with the pace of production growth. They expect that demand for crude palm oil to remain “benign” and thus believes that the continued strong production figures may not lead to “inventory clearance” and hence increased earnings.

Ying Jian’s and Simone’s Call: UNDERWEIGHT, with target price of $0.50 (potential downside of 17.36 percent*)

On the direct opposite of Ying Jian, Carey Wong of OCBC Research points out that Golden Agri’s management remains upbeat about its prospects. Carey writes,

“… CPO (crude palm oil) prices are likely also supported by the limited supply of other vegetable oils… [GAR] expects to spend US$550 million in capex (capital expenditure) to both upstream and downstream operations.”

Carey’s Call: HOLD, with target price of $0.63 (potential upside of 4.1 percent*)

However, Ivy Ng of CIMB feels that the downstream expansion will take time. She goes on to say that,

“… we see near-term cost pressure from the commissioning of two new refineries in 2013, hiring of senior professionals at end-2012 to expand the distribution network for its palm products and higher finance costs due to bond issues.”

In short, Ivy has turned negative over Golden Agri and thus downgraded the counter.
Ivy’s Call: NEUTRAL, with target price of $0.70 (potential upside of 15.7 percent*)

With significant headwinds foreseen to blow heavily at Golden Agri, will the counter rise up to the task? Or will it be blown away with the rest of its peers? The crude palm oil market looks to be a very volatile sector in 2013 and will be subject to much attention moving forward. Perhaps, investors will do well to keep away from the sector till things brighten up a bit.

*Based on 4 March 2013 closing price of $0.605 per share

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This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Golden Agri-Resources  0.270 -0.005 -1.82%   
Business: Co is engaged in cultivating & harvesting oil palm trees, processing fresh fruit bunches (FFB) into crude palm oil (CPO) & palm kernel (PK), & refining CPO into industrial & consumer pdts.

Insight: May-19, 1Q19 revenue fell 11% due to softer crude ... Read More


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