Golden Agri - Downgrade to Hold on reality check


Fairly valued; 3Q15 results downside risk cushioned by CPO price tailwind
While we are bullish on CPO price prospects and Golden Agri (GGR) is a liquid proxy, it currently trades at 17.8x FY16E PE on a CPO price assumption of US$685/mt (which is 20% above the spot price), indicating that GGR is fairly valued. Its 97.2%-owned subsidiary - PT SMART's 3Q15 results also spell downside risk to FY15 earnings, which leads us to cut our FY15E profit by 27%. However, we think a Hold rating is justified as there may be more upside to CPO prices on the back of tightening supply and rising demand.

PT SMART records US$4m core net loss in 3Q15
SMART is 97.2%-owned by GGR and owns 29% of GGR's total land bank of 485k ha. SMART's profits usually account for 11-162% of GGR's earnings. The shockingly weak 3Q15, in our view, might be a prelude to weak GGR 3Q15. SMART's weak result is driven by 17% QoQ and 50% YoY COGS spike, while revenue has only grown 1.7% QoQ and 33% YoY. We have, thus, cut our GGR FY15E profit by 27% to US$141m but left FY16E unchanged as it is already 13% below consensus.

Bullish CPO price outlook should cushion GGR's earnings disappointments
Dry spell potentially curtailing 2H16 production growth coupled by Indonesia's biodiesel mandate reimplementation are likely to drive CPO price above our FY16 CPO price assumption of US$685/mt. Current CPO price upside is capped by improved new soybean planting in Latin America and rising CPO stockpiles in Malaysia. Given GGR's rich FY16 valuations, investors thus need a stronger CPO price rally to justify a Buy thesis.

Technical Analysis
Daily Chart
GGR trades at 17.8x FY16E PE - fairly valued in our opinion 
Our target price of SGD0.37 is based on a FY16E P/E of 20x. Key upside risks include better-than-expected crushing margin in China and SG&A control. Downside risks are GGR cost escalation from production or headquarter front. (Read Report)

Source : Deutsche Bank Markets Research

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