SINGAPORE (May 28): Golden Agri-Resources (GAR) might have seen its share price fall close to 20% since mid-April, but OCBC Investment Research analyst Low Pei Han believes that it is “still not compelling”.

“The stock is trading close to its historical mean over the past five years, which is comparatively less demanding but still not yet compelling, unless CPO (crude palm oil) prices stage a faster-than-expected recovery,” Low says in a Monday report.

However, Low opines that this recovery is unlikely, the recent correction in crude oil prices has made palm oil less attractive for blending into biofuel.

In addition, she notes, weak soybean oil prices – a substitute for palm oil – are also keeping the palm market under pressure.

Low cites GAR’s weaker-than-expected 1Q results as a possible reason for its recent share price decline, on top of the recent market sell-down.

The group saw its underlying profit fall 53% to US$12 million ($16.5 million) for the 1Q19 ended March.

Earnings for 1Q19 rose 55% to US$18 million – accounting for just 17% of OCBC’s full-year expectations. And even then, this was mainly contributed from the one-off gain on disposal of a subsidiary in Indonesia for US$11.5 million.

1Q19 revenue fell 11.0% to US$1.6 billion, while gross profit dropped 22.3% to US$192.8 million.

See: Golden Agri reports 55% higher 1Q earnings of $25 mil on gain of disposal

“Post the set of lower-than-expected results, we have lowered our FY19F estimates but kept our FY20F numbers intact,” says Low.

OCBC is maintaining its “hold” call on GAR but lowering its fair value estimate by 6.9% to 27 cents.

Meanwhile, Low believes government policies in Indonesia and Malaysia are expected to provide support to palm oil prices.

“Both countries [are increasing] the mandatory use of diesel containing locally produced biofuel,” she says. “For instance, Indonesia implemented the B20 programme since September 2018, and there are expectations that the B30 programme may arrive by the end of this year.”

As at 12pm, shares in GAR are trading half a cent higher at 26.5 cents. This implies an estimated price-to-earnings (PE) ratio of 28.0 times and a dividend yield of 2.3% for FY19F.