SINGAPORE (Sept 13): OCBC is maintaining its “hold” call on Golden Agri with an unchanged fair value of 36 cents given the research house expects few catalysts in the near term.

This comes despite OCBC Research having upgraded its crude palm oil (CPO) outlook with the group’s long-term initiatives in place.

The Malaysian Palm Oil Board on Monday released data which showed an 8.8% m-o-m rise in Malaysia’s palm oil stocks, 0.9% decrease in palm oil production and 6.4% increase in exports.

In a Tuesday report, lead analyst Jodie Foo, says, “Recall that our view on CPO price outlook had been bearish, given the higher CPO production expected in 2017, sustained low oil prices, and healthy global alternative oilseed production weighing on overall oilseed prices.”

Due to the fall in crude oil production in June and a healthy demand for palm oil in the first seven months of 2017, OCBC Treasury Research recently revised its CPO outlook to RM2,600/MT ($832/MT) from RM2,250/MT.

Underpinned by expectations of demand and restocking by key markets China and India, this estimate lies within the group’s anticipation of between US$600/MT and US$700/MT ($800/MT and $941/MT).

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“Note that these supply and demand factors have supported CPO prices, with prices up ~4% for the past month,” says Foo.

The group in 2Q17 saw good production growth and expects FY17 production to reach about 20% growth along with largely steady prices.

The analyst acknowledges Golden Agri’s initiatives to sustain longer term growth as the age of its estates averages about 16 years, which is considered one of the oldest among its plantation peers.

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This includes having two clones of high-yielding oil palm planting material that could potentially increase yields to above Indonesia’s industry average yields. Hence, replanting activities with higher-yielding seeds could accelerate next year and help the group attain a favourable age profile.

The group is also planning to improve long-term margins for the downstream segment by strengthening integration and efficiency along the supply chain.

“Product portfolio continues to extend alongside increasing sales of palm-based refined products, while capacity is expanding in areas such as for kernel crushing in South Kalimantan,” says Foo.

As at 3.55pm, shares in Golden Agri are trading at $4.81 or 22.2 times 2017 forward earnings with a dividend yield of 1.3%.

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