SINGAPORE (Mar 24): RHB Group Research is downgrading its ratings for plantation players Golden Agri-Resources (GAR) and Bumitama Agri (BAL) on the back of lower crude palm oil (CPO) price assumptions.

From “buy” calls on both counters previously, the research house is cutting GAR to “sell” and lowering BAL to “neutral”.

RHB is also slashing its target price for GAR by half to 12.5 cents.

“After imputing our revised CPO prices assumptions, we cut our FY2020F earnings by 55% and FY2021F-2022F by 15-16%,” says RHB’s research team in a March 24 report.

“While the weakened CPO prices are partly buffered by Golden Agri’s downstream segment, valuation seems expensive versus peers – it is currently trading at a hefty 28 times [price-to-earnings], even after its recent price retracement,” RHB adds.

Meanwhile, BAL is getting its target price slashed by even more. RHB now has a target price of 38 cents on BAL, some 55% lower than the previous target of 85 cents.

“Bumitama, being a pure planter, would suffer from the weaker CPO prices more than its peers who have downstream operations,” says RHB in a separate report on March 24. “After imputing our revised CPO price assumptions, we have cut our earnings for FY2020-2021F by 16-30%.”

The lower forecasts come on the back of the research house lowering its CPO price forecast to 2,400 ringgit per tonne for 2020, from 2,600 ringgit per tonne previously.

The CPO price forecasts for 2021 and 2022 remain intact at 2,500 ringgit per tonne.

However, the brokerage warns that CPO prices could fall to the “worst case scenario” of between 2,000 ringgit per tonne and 2,200 ringgit per tonne.

“Our worst case scenario for demand is still a possibility if Covid-19 is not arrested by end 2020 and crude oil prices do not recover in 2H2020 as projected by our in-house crude oil forecasts,” RHB says.

According to RHB valuations, Golden Agri is trading at an estimated P/E of 27.1 times and a dividend yield of 1.8% for FY2020F.

Meanwhile, Bumitama Agri is trading at an estimated P/E of 12.0 times and a dividend yield of 6.0% for FY2020F.

As at 11.42am, shares in GAR are trading half a cent higher, or up 3.9%, at 13.4 cents, while shares in BAL are trading half a cent lower, or down 1.4%, at 36.5 cents.