Noble Group Ltd: Our preferred pick within the commodities sector

Rosy prospects at undemanding valuations. Evidence of a global economic recovery has enhanced investors' preference for cyclical stocks such as commodities. Most stocks have appreciated significantly on expectations of earnings recovery, leaving few with cheap valuations. Against this backdrop of weighing the twin objectives of valuations and outlook, we reiterate Noble Group Ltd (Noble) as our preferred pick within the commodities sector. Noble has performed exceedingly well against an extremely challenging boom-and-bust cycle in 2008 and 1H09. Relentless market share gains have driven volume growth and good balance sheet management has yielded the group superior financial flexibility to capitalise on inorganic growth opportunities. We expect Noble to reap the rewards of its good management in FY10 as global economies recover and commodities markets normalise.

Multiple growth drivers, strong financial flexibility. Noble's growth prospects are backed by several drivers: (i) market share gains as buyers seek quality counterparties, (ii) normalising commodities markets, (iii) new capacity coming on stream, and (iv) inorganic growth. Noble recently acquired distressed assets of SemFuel via bankruptcy proceedings. The acquisition is expected to boost its product portfolio and enhance synergy. We believe that more distressed assets could emerge from the economic slump. Noble is well positioned to capitalise on such opportunities given its strong cash position (US$805.8m as of 1H09). The group's prudent balance sheet management has allowed it to fund acquisitions without needing to raise additional capital. In contrast, its peer Olam has recently raised additional capital to fund inorganic expansion, at the expense of diluting existing shareholders' interests.

Reiterate BUY, fair value raised to S$2.50. We have raised our FY10 revenue and earnings assumptions on the back of stabilising commodities prices. This lifts our fair value estimate to S$2.50 (previously S$2.26). Despite the recent share price appreciation, Noble trades at just 13.6x FY09F PER, a sharp discount to Olam's 22.7x PER. Current valuations are also undemanding against its historical valuations of 4.1x to 22.1x PER. The stock may see an upward re-rating as investors gain appreciation of its sound balance sheet health. We maintain our BUY rating on the stock.

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Wilmar International: Stronger then expected 2Q09

Ahead of expectations. Wilmar's 2Q09 EBIT and net profit rose by 8.8% and 14.0% y-o-y to US$538.7m and US$378.1m, respectively - despite a 27% y-o-y drop in revenues to US$5,712.3m. The group's 2Q09 pretax margin eased to 9.2% from 10.5% in 1Q09, but rebounded from 5.6% in 2Q08. Sequentially, palm & lauric merchandising and processing (M&P) pretax margin/MT declined to US$41 (from US$55 in 1Q09); although that for oilseeds dropped to US$27 (from US$47 in 1Q09). While flat to weaker oilseeds M&P margin was anticipated, that for palm & lauric came out stronger than expected. The group's consumer products also posted strong pretax margin of US$88/MT (vis-vis our initial forecast of US$35/MT for the full year).

Recovering commodity prices reflected in higher debts. Short-term borrowings increased to US$6.1b from US$3.4b in 1Q08 mainly to account for higher working capital needs on recovering feedstock prices q-o-q. Total borrowings increased to US$7.7b at the end of June translating to net gearing ratio of 37.8%, up from 22.6% in 1Q09.

TP upgraded to S$7.25, Buy call reiterated. We raised our assumption of palm & lauric M&P margin to 5.8% (from 4.4%); but reduced that for oilseeds M&P to 7.0% (from 7.7%). We also raised consumer products' margin assumption to 7.0% (US$87/MT) from 2.8% (US$35/MT), in light of the stronger-than expected performance. FY09F-10F earnings were hence upgraded by 13.2%-12.5%. We raised our DCF-derived, fully diluted fair value to S$7.25 (WACC 9.8%, terminal growth rate 3%). Our Buy call is reiterated for 16% upside (excluding 1% FY09F dividend yield).

Indofood Agri Resources - 2Q09: Results above expectations; expect sturdy margin in 2H09

2Q09 core net profit jumped 78% qoq due to higher CPO ASP. We expect margin to remain stable in 2H09. We raise our target price to S$2.00 on higher margin assumption and a stronger rupiah against the US dollar.

Strong 2Q09 earnings on higher ASPs and forex gains. Indofood Agri Resources (IFAR) posted strong 2Q09 core net profit (excluding changes in fair value of biological assets), which increased 78% qoq to Rp427b. This was mainly attributable to higher crude palm oil (CPO) average selling prices (ASP) (+24% qoq) offset by lower CPO sales volume (-3% qoq), as well as forex gains of Rp240.2b in 2Q09 vs a loss of Rp94.8b in 1Q09.

1H09 core net profit, however, declined 21% yoy. Results are above our expectation as 1H09 core net profit represents 63% of our previous forecast. EBITDA margin improvement in 2Q09. EBITDA increased 31% qoq in 2Q09 on stronger revenue while cost held steady. Therefore, EBITDA margin improved to 37% in 2Q09 from 33% in 1Q09.

Sturdy CPO production ahead. As about 40% of plantation area is in the prime age and can produce high yield, and another 29% is expected to become mature area of about 54,789ha, we expect fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11.

Expect stronger revenue and sustainable margins in 2H09. We expect IFAR to post robust revenue growth in 2H09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices. Fertiliser prices ytd have fallen 30% compared with that in 2008. And IFAR’s current fertiliser price is 10% lower than in 1Q09.

Maintain BUY. As we have lifted our earning forecasts, we therefore raise our target price from S$1.45 to S$2.00, based on 12x 2010F PE for mid-cap and integrated plantation players.

More clarity on Wilmar China IPO valuation?

Strategic investment by the Kuok Group: In an announcement yesterday evening by Wilmar International (WIL), Wilmar China Limited (WCL) – a wholly-owned subsidiary and the entity for the China business IPO – has sold 1.61% of the enlarged issued share capital of WCL for HK$1.93 billion (US$250 million) to 3 entities (Kerry Holdings Limited, Great Cheer Limited and Zheng Ge Ru Foundation) which are members of the Kuok Group. This essentially values WCL at ~US$15.5 billion based on our estimates.

Valuations: The transaction price values WCL at 20x/18x & 19x/17x consensus/J.P. Morgan earnings estimates for FY09E/FY10E based on 50% of WIL’s group earnings (which is derived from China).

Subscribers to top up in the event of better valuation achieved: The announcement further indicated that in the event the valuation obtained in the IPO is higher, the subscribers will be required to top up the valuation difference to WCL while no adjustments will be made if the valuation achieved were equal or lower.

Transaction sets a floor valuation, confirming management guidance: We believe this transaction essentially sets a floor to the valuation of the China business IPO at ~20x P/E which sends a strong signal that the 20-25x P/E valuation range guided by the company is achievable.

First Resources - Remain cautious due to earnings volatility

Despite strong 2Q09 results and the strengthening of the rupiah against the US dollar, we remain cautious on FR’s earnings volatility on cross currency swap. Downgrade to SELL with a fair price of S$0.90.

Focusing and expanding on upstream business. FR plans to expand its upstream business through expanding its plantation business with long-term target of about 200,000ha. Currently, FR owns about 170,000ha of landbank and planted area of 100,300ha (nucleus and plasma). It will only expand its downstream business once its crude palm oil (CPO) production hits 1.0m tonnes. In 2008, it produced about 323,000 tonnes of CPO.

Higher CPO production coming on stream in 2H09. On the back of the usual seasonality patterns in 1H09, FR expects 2H09 CPO production to exceed 1H09 by about 18%. It targets a 10% yoy increase in CPO production in 2009 and another 10% yoy growth in 2010.

Most CPO production would be sold on “spot-basis” in 2H09. FR has a selling policy to maintain forward selling by not more than 40% of total CPO production. In 2H09, FR expects most of its CPO production to be sold on “spot-basis”. It sells only about 15% of its production based on forward contract. Its long-term contract with Wilmar is expected to expire by the end of 2009.

We raise our net profit forecasts for 2009 and 2010 by 4% and 3% to Rp619b and Rp886b respectively after fine tuning our models given a stronger rupiah vs the US dollar.

Downgrade to SELL with a higher fair price. As we rollover our PE valuation into 2010F, we raise our fair price from S$0.39 to S$0.90, pegged at 10x 2010F PE (small-cap, upstream player). However, as the share price of FR has exceeded our fair price and we remain cautious on its earnings volatility, we downgrade the stock to SELL. We prefer Indofood Agri Resources (BUY/Target: S$2.00) on better earnings visibility and undemanding valuation of 11.4x 2010F PE.

Wilmar - Need To Expedite

A Department director of China’s National Development & Reform Commission yesterday warned that the soy crushing capacity in the country is “far larger than needed”, suggesting Beijing could push for consolidation in the sector.

(About half of the 80 mln tones of annual soy crushing capacity were not operating in 2008, vs 44% utilization in 2007. The situation is unlikely to improve in 2009, hence the need for consolidation.)

Wilmar is the largest in China with daily average capacity of 32,000 tonnes, vs state-owned COFCO’s 17,100 tonnes. As China had earlier restricted expansion by Wilmar, the latest news should not affect it that much.

Even so, it should expedite the listing of its China operations in Hong Kong. (It has been 4 months since Wilmar first confirmed such plans.) Indications are that the IPO by end ’09 is on track.

We have a Trading BUY on Wilmar, pending the HK listing, and despite its “rich” valuation. At $6.50 (market cap of S$41.19 bln), Wilmar is on 17.5x latest 12 months earnings of US$1643.34 mln / S$2347.62 mln.

Golden Agri-Resources - 2Q09: Strong results but below expectation

Net profit of Golden Agri Resources (GGR) soared by 543% qoq in 2Q09. As share price has exceeded our fair price, we downgrade to stock from BUY to SELL.

Strong results in 2Q09, but still below expectation. Net profit of Golden Agri-Resources (GGR) soared by 543% qoq to US$55m in 2Q09 on the back of higher palm products production (+30% qoq) and higher CPO price.

However, 1H09 net profit still declined 78% yoy due to lower ASP, higher fertiliser costs and lower production. Results were below our expectation as 1H09 net profit represents only 25% of our full-year forecast.

CPO production volume recovered in 2Q09. CPO production rose 31% qoq in 2Q09 but still fell 2% yoy in 1H09 as the company experienced poor 1Q09 production on the back of biological tree stress, and less favourable weather conditions, mostly in southern parts of Sumatra and South Kalimantan.

Margin improved on sturdy CPO prices. Gross margin improved to 23% in 2Q09 on stronger CPO prices. But 1H09 gross margin declined to 20% due to forward buying on higher fertiliser cost as well as lower selling prices.


Target 30,000ha of new planting in 2009. GGR targets new planting area of 30,000ha for 2009. During 1H09, the company added 9,800ha of new planting area. This year, the company has a capex of about US$225m.

Higher earnings in 2H09. We expect higher earnings in 2H09 than in 1H09 on the back of sturdy CPO prices in 2H09 as well as improved margins mainly from lower fertiliser cost in 2H09. Management indicated that nucleus production cost (ex-mill) is expected to maintain at US$250/tonne in 2009.

Downgrade to SELL. As share price has exceeded our fair price, we downgrade GGR from BUY to SELL with a fair price of S$0.48, based on 12x 2010F PE for mid-cap and integrated plantations players. We recommend investors to take profit on GGR and start to accumulate at S$0.40.

Straits Asia - Forestry request approved

Straits Asia has been granted permission to mine the Northern area of its Sebuku operations, the so-called Cagar Alam concession, after waiting for over three years. The approval is inline with our long-time expectation and incorporated in our current valuation and price target.

The advantages of the approval are four fold for Straits Asia; that is, 1) 50-60mt higher reserves from a 12 meter thick coal seam, 2) 2-6mt higher production in the medium-term, 3) lower weighted average costs due to low 4x stripping ratio, and 4) weighted average higher selling price due to higher coal quality. We expect the company to increase production within nine months and for the Sebuku mine to produce 3-4mt in 2010.

We re-iterate our Buy rating on Straits Asia despite its strong performance year-todate as we expect a shortfall in thermal coal over the next two years. We believe coal demand will regain momentum inline with economic growth, while supply remains tight due to neglect and lack of investment. As Chinese metal smelters ramp up production in H209, we note that coal prices should strengthen further as they account for 25-30 pct of power consumption.

Our 12-month price target of S$2.50 is based on a 2010E PE multiple of 12.7x and WACC of 13%.

Olam - Growth is in the price

Olam is trading at 23x diluted FY10F EPS, a significant premium toother regional agri players. We believe the stock is fully pricing in our diluted earnings CAGR of 18% over FY09F-FY11F, and implied upside is limited. We thus downgrade Olam to NEUTRAL from Buy.

We increase FY10F earnings by 6% and by 2.5% for FY11F, driven mostly by lower assumptions for debt and financing costs as compared to our earlier estimates.

Delivering returns on investments and M&A’s will be critical in determining the company’s future business momentum. Olam has invested about US$750mn in various mergers and acquisitions over the past two years. We believe it has seen mixed results in integrating and improving the profitability of new ventures.

Recent equity dilution worth S$437mn to Temasek helps Olam’s balance sheet. Olam’s net gearing should fall from ~4x in FY08 to 2.1x in FY10 post dilution. The near-term impact from the stake sale looks positive, as our calculations indicate FY10F earnings would have been 5% lower sans equity raising.

We recommend switching from Olam to Noble Group as we expect Noble to outperform Olam driven by attractive valuations on a similar return profile, key Greenfield investments nearing maturity and likely re-rating due to restructuring of its coal assets portfolio.

Indofood - Misperception and earnings growth – strong stock drivers

The misperception of Indofood’s earnings quality and growth suggests significant upside. Importantly, the noodle business, and not CPO, will drive future profits, accounting for two-thirds of NPAT. We raise our earnings estimates by 27% and 32% for FY09 and FY10, respectively, putting us at 36% ahead of the Street.

We believe there is material upside to our estimates as they are based on a modest 2% increase in noodle prices, a wheat price that is 15% higher than spot and an assumption of no debt paid down.

We believe that Indofood’s earnings are relatively insulated from the volatility in commodity prices. Indofood is 3x less volatile than pure CPO plays. A 10% increase in wheat prices can be offset by a < 2% increase in the price of noodles.

As Indofood is trading at 10.6X FY10 (7.1X ex-IFAR), we find it attractive. We raise our target price to Rp3,500, implying FY10 P/E of 14.7X and 11.7X ex-IFAR, a material discount to regional peers’ 15.2X. The implied valuation does not appear to be too demanding given the stability of the company’s earnings, and because it is one of the best proxies to domestic consumption. Risks: rupiah volatility and rising wheat prices.

First Resources: New US$100m CB to have 7% dilution

First Resources today announced the issuance of US$100m new Convertible Bonds (CB) with 5.625% coupon and conversion price of S$1.24735/share using fixed exchange rate of S$1.4479/USD. The tenor for the CB is 5 years (maturity date 22 September 2014) at 104.34%; with a put option in 3 years' time (22 September 2012) at 102.44% (yield to put: 6.375%).

As a result of the issuance, the group's net gearing is estimated to decline slightly to 0.23x from 0.26x as at 30 June 2009 after accounting for the value of the equity portion of the CB, minus cash received (net of issuance cost).

Upon full conversion, the CB would represent 116,078,086 new shares, or 7.3% potential dilution - to the current share price (excluding net interest) or to S$1.02 in our TP (from S$1.10). We will account for the dilution when it is in the money.

We are maintaining our Hold call on the stock with TP S$1.10.

Olam - Sell-down overdone

Olam announced the launch of a new 7-year convertible bond issue of US$400m. While the market should not be surprised at new debt-raising, given management’s earlier explicit intention to gear up, we believe a potential equity dilution of about 10% will result in slightly negative sentiments.

Management expressed that the main attraction of this deal was the long tenure, which is in line with its intention to lengthen the overall term of its debt portfolio to match higher asset intensity. While the entire amount may not be utilised in the immediate term, being backed by this cash will give management the confidence in executing M&A plans.

Post-CB, Olam has an estimated cash position of US$900m. With no immediate re-financing needs, non-utilised cash for the moment will be used to retire existing higher interest debt. CEO Sunny Verghese stated that there is unlikely to be another equity-linked capital raising exercise for the next 3 years and reiterated the target gearing ratio of 2.5-3.5X for working capital and 1-2X for long-term assets.

Separately, Olam also announced the acquisition of a stake in New Zealand Farming Systems Uruguay (NZFSU), a New Zealand-listed firm with its dairy farming operations in Uruguay. The stake was purchased via Hunter Hall Investment Management. At this moment we believe earnings contribution is negligible, although this small non-controlling stake could be a precursor to a larger stake in the future.

While we believe there could be a potential share price overhang around the conversion price, the 7.3% sell-down has been overdone, and is a good entry point for investors. Conversion price now represents a 35% premium to current share price. We maintain our target price of $2.98 which is based on 25X 2010F.

Indofood Agri Resources - Outsized good results

Indofood Agri Resources (IndoAgri) reported 2Q FY09 results before the market opened on 14 August. Net profits declined 3.9% YoY, down 19.3% YoY if one excludes the effect of a non-cash bio-asset revaluation gain.
The lower YoY revenues were primarily due to lower prices, which were partly offset by higher volumes produced.

After taking into consideration two distorting items (ie, bio-asset revaluation and forex gains for a US dollar-denominated balance sheet/revenue cross-hedge), the results were slightly better than our expectation. As a result, we have raised our FY09 adjusted net-profit forecast (excluding bio-asset revaluation) by 9.6%. Our new adjusted net-profit forecasts are now in line with Bloomberg consensus. Including the bio-asset revaluation, we have raised our FY09 net profit forecast by 50.9%. No major surprises were announced at the company’s analyst briefing.

Our six-month quantitative-model-derived target price is S$1.08. The downside reflects our assumption that IndoAgri’s stock price will follow the crude palm oil (CPO) price lower to our projected target level of US$525/tonne by 31 December 2009 from its current level of around US$700/tonne.

We have a Sell rating on IndoAgri, based on our view that CPO prices may decline by year-end. This anti-consensus view is based on our thesis that global CPO supply will rise HoH in 2H09 due a recovery from impaired yields from ‘tree stress’ and the seasonal peak growing season.

Noble Group Ltd: 2Q09 in line, outlook improving

2Q09 results within expectations. Noble Group Ltd's (Noble) 2Q09 performance was in line with expectations. Revenue eased 31.2% YoY to US$7.2b along with lower commodities prices, while net profit doubled to US$248.8m thanks to a one-off revaluation gain arising from the Gloucester acquisition. Stripping away this gain, net profit would have contracted by 22.6% to US$94.8m. Sequentially, Noble's performance improved with revenue gaining 18.0% and net profit expanding by 5.1%. The operating environment displayed signs of normalising in 2Q09, leading management to adopt a more confident stance as it heads into 2H09.

Growth in market share. 1H09 tonnage grew 19.4% YoY, demonstrating Noble's ability to grow its market share despite harsh operating conditions. With the exception of Agriculture, all other segments reported higher tonnage. The group's market share gains put it in good stead to leverage on the economic recovery when demand for commodities strengthens. In particular, we expect tightening energy markets to drive Noble's growth in 2H09. Higher energy prices have already helped to buoy the energy segment's gross profit margin, which expanded to 2.3% in 2Q09 from just 0.9% in 1Q09.

Blip in MMO does not taint outlook. A blemish in its 2Q09 results came from the Ferro Alloys division's losses - the result of a collapse in prices. This resulted in gross profit margin contraction for the Metals, Minerals & Ores (MMO) segment. Nevertheless, management remains confident of the MMO segment's outlook, citing strong performance from all other divisions coupled with robust tonnage growth. Normalising economic conditions and sustained demand from China will support its performance going forward.

Balance sheet remains healthy. Noble's conservative balance sheet management has enabled it to tide through volatile commodity markets, and will equip it with financial flexibility to emerge stronger from the downturn. Inventory hedge ratio remained healthy at 94%, a slight improvement over the 93% recorded in 1Q09. The group's inventory levels rose from US$1.8b to US$2.0b, and according to management, this is a precursor of improving conditions ahead. Adjusted net gearing came in at a conservative 0.15x (vs. a net cash position in 1Q09), and credit facilities remain ample at US$3.4b.

Improving outlook; maintain BUY. We expect Noble to be a key beneficiary of the global economic recovery. Improving demand and supply fundamentals, the resurgence of commodity prices and market share expansion will drive its 2H09 performance. Valuations remain undemanding at 12.2x FY09 PER (vs peer Olam's 27.3x). We maintain our BUY rating and S$2.26 fair value estimate.

Golden Agri-Resources - 2Q09 Yields Surprise

Reiterate OW: We upgrade our PT to S$0.55 per share on higher FY2009-11e EPS estimates. The share price for Golden Agri-Resources (GGR) is now discounting a CPO (crude palm oil) price of US$730/T vs. our FY2010 estimate of US$800/T. GGR will trade at FY2010e PE of 10x at our new TP, low against sector average of 14x.

Surprise in 2Q09 Yields… GGR’s 2Q09 FFB yields came in 22% higher than our estimate and 4% above 2Q08. Indonesian-wide FFB yields, which suffered from tree stress since 2H08, is now back to normal, we think. …Drive EPS Upgrade. 2Q09 net profit came in 54% above our estimates on positive operating leverage unleashed from the higher-than-expected CPO production/sales volume. We revise our EPS estimates higher to account for the higher CPO production/sales volume and margins.

CPO Stocks Remain Tight: Despite the recovery in Indonesian production yields in 2Q09, global CPO stocks remain tight in the near term for two reasons: 1) Yield stress is not over in Malaysia. We see yield recovery only in 2010 for Malaysia; and 2) CPO export demand remains robust.

Best Upside within Coverage: Our 2009-11e EPS estimates are 27% above consensus, mainly on our higher CPO price assumption. Currently, GGR has the best share price upside of 20% within our coverage universe. Near-term catalysts: 1) Consensus earnings upgrade; 2) Firm CPO price trend going into Ramadan festival; and 3) Good 3Q09 results in November 2009.

Agri-Resources - Supportive 2Q09 Results

Stay OW: We maintain our PT for Indofood Agri-Resources’ (IFAR) at S$1.90 per share as we are keep our EPS estimates essentially unchanged. IFAR’s share price is now discounting a CPO (crude palm oil) price of US$770/T vs. our F2010 estimate of US$800/T, we estimate. At our PT, IFAR would trade at F2010 P/E of 11x, which we view as attractive against a sector average of 14x.

Supportive 2Q09 Results; EPS Unchanged. IFAR’s 2Q09 plantation profits grew 40% Q/Q, offsetting the lower profits from non-plantation divisions. The net impact is neutral to our estimates. Given positive company guidance, we expect better non-plantation profits in 2H09.

CPO Stocks Remain Tight: We believe the CPO price will remain firm in the near term. Indonesian FFB (fresh fruit bunch) yields recovered in 2Q09, but we continue to see tightness in global CPO stock levels in the near term for two reasons: 1) yield stress is not over in Malaysia as we see a yield recovery for Malaysia only in 2010; and 2) CPO export demand remains robust.

10% Upside: Our 2009-11 EPS estimates are 18% above consensus on our higher CPO price assumption. Long term, IFAR is one of top two picks within our CPO coverage; KL Kepong (KLKK.KL, OW, RM13.40) being the other. However, short term, we prefer Golden Agri-Resources (GAGR.SI, OW, S$0.48; +20% upside) and KLK (+19% upside) given their superior share price upside. Near-term catalysts: 1) Consensus earnings upgrade; 2) firm CPO price trend going into Ramadan festival; and 3) good 3Q09 results in November 2009.

Olam - A unique investment proposition

We believe Olam continues to be a good proxy for the agricultural theme, as the growth of long-term global demand outstrips supply. With a good farm-to-factory business model, sourcing and marketing presence in more than 60 countries, these trends will lead to volume growth and margin expansion opportunities.

Since 2007, Olam has pursued an integration strategy that involves selectively owning assets such as midstream processing capacity in the supply chain. This allows the Group to become less of a price-taker. While its traditional trading business nets a steady 2% margin, the market could have underestimated a potential expansion to 2.8% by FY11.

With a lowered gearing ratio of 1.8X following Temasek’s $437.5m equity injection in June, Olam now has sufficient credit headroom to pursue an estimated current pipeline of more than 10 M&A deals. In the post credit-crisis environment, we see more opportunities for acquiring good distressed assets at attractive prices, such the recent SK Food deal.

While Olam might seem highly leveraged using conventional ratios, such concerns are unwarranted due to the liquid nature of its large inventory. Furthermore, we believe the subsiding of the credit-crisis, Temasek’s equity injection, together with management’s recent voluntary reduction of target gearing level to 2.5X-3.5X, has sufficiently addressed this.

We believe Olam’s growth profile for a company of its size continues to present a unique proposition. We estimate Olam’s EPS (normalised) to grow at a CAGR of 27% from FY10-FY11, significantly above its peers. With this growth profile, we have pegged our target price of $3.05 to a premium 25X FY10F, which is still below its historical average of 31X PE.

Golden Agri-Resources Ltd: Maintain HOLD

2Q09 results mostly within expectations. Golden Agri Resources (GAR) released its 2Q09 results on Friday; revenue was down 30.7% YoY but rebounded 37.2% QoQ to US$565.6m, aided by slightly firmer QoQ CPO (crude palm oil) prices as well as higher production volume. The average CPO price fell from US$1117/ton in 2Q08 to US$696/ton in 2Q09 but was an improvement from US$511 in 1Q09. As a result, while net profit tumbled 64.7% YoY, it was up nearly 543.0% QoQ to US$55.1m. For the first half, revenue fell 37.5% to US$977.8m, meeting 41.9% of our original FY09 estimate, while net profit slid 78.1% to US$63.7m, or about 23.6% of our full year forecast.

CPO production likely bottomed in 1Q09. Operationally, it appears that the worst of the previous tree stress (due to the drought in 2006) has passed; CPO production increased 15.1% YoY and 30.8% QoQ, while CPO yield improved 1.5% YoY and 26.9% QoQ. We also understand that due to the better-than-expected production, GAR has about 100k ton of unsold CPO at end-Jun, but has since been sold. And while there may be a possible El Nino effect this year, management believes that the impact will probably be felt some 12 months later. It is also confident that it will escape the worst of the impact due to the dispersion of its oil palm plantations in Indonesia. Management is hopeful of seeing better production numbers in 2H09; also assured that it will not have excess unsold CPO this time around.

Bumping up our CPO assumptions. The recovery in the global economies has come slightly faster than expected and this has lent some support to crude oil prices and CPO prices. We have also raised our CPO assumptions for this year from US$600/ton to US$620/ton, and this in turn bumps up our FY09 revenue forecast by 6.8%. However, we raise our net profit estimate by a smaller 4.2% as GAR will still be working through the excess fertilizer that it had bought at a much higher price late last year; management expects to only enjoy lower fertilizer prices from next year onwards. We are raising our FY10 revenue and earnings estimates by 6.0% and 11.0%, respectively. Using a higher 12x blended FY09/FY10 EPS valuation (vs. 10x previously), our fair value will rise from S$0.35 to S$0.45. Given the limited upside, we maintain our HOLD rating.

Wilmar International – Price target raised to S$7.50 – maintain Buy

Wilmar posted 2Q09 results that were ahead of expectations, mainly from stronger commodity prices. Net profit came in at US$407.2m, up 22.7% from 2Q08, and up 7.1% sequentially. Wilmar has also continued its momentum from 1Q09, despite earlier indications that last year’s record earnings could not be matched. We now believe that the group is capable of surpassing this benchmark, and have raised our forecasts accordingly. Wilmar also declared an intereim dividend of S$0.03 per share.

Despite 2Q09 headline revenues declining by 27% YoY, sequential revenues have actually increased by 15% to US$5.7bn, on the back of a recovery in commodity prices. More encouragingly, however, sales volumes have increased across the board, with the minor exception of consumer products.

Despite this, the consumer division managed to hold on to its uncharacteristically high margins at 7.2%, versus 8.4% in 1Q09 and 1.6% in FY08. Merchandising & Processing saw some sequential erosion of margins, due to higher commodity input prices, but is still handily ahead of last year’s average. Its upstream Palm Plantation and Milling business naturally showed an increase in margins, from higher CPO prices.

We are raising our FY09 forecast by 21% to US$1,631m, and by 15% in FY10 and FY11. This implies a 3-year earnings CAGR of 10% versus our previous expectation of around 5%. Aside from the recovery in CPO prices, Wilmar will also be a beneficiary of an economic recovery in China and India, and has an established distribution network that it can use to grow its existing and new businesses.

With the earnings upgrade, we are raising our target price of Wilmar to S$7.50, from S$5.70 previously, and assigning a premium valuation of 20x FY09 earnings. Its application to list its China businesses in Hong Kong was recently approved, and we believe that Wilmar will be able to secure above-average valuations. We expect the listing to take place within the next two months, and strong investor interest in the stock is likely to continue, leading up to this.

AusGroup Ltd: Rio Tinto increases capex target for 2009 by 25%

Major AusGroup customer Rio Tinto released 1H09 results yesterday.

2009 capex target up 25%. Rio Tinto's management said they have revised their capex target upwards for 2009. The new target for 2009 capital expenditure is US$5b (up 25% from US$4b previously). US$2.7b of this amount is allocated for development projects.

Reviewing 2010 target. Management is also reviewing its 2010 target in light of improved market conditions. The previous target was for US$2.5b, allocated for sustaining capex only. It will release the new guidance in October.

Focus on "high definable near-term value".Rio Tinto said for the moment, it is focused on brownfield step-ups (increasing capacity, for instance). It said this was the most efficient allocation of capital (a small investment for a big uptick) in the current environment. Rio Tinto also said that down the road, "of course" it would invest in greenfields.

Confirms our view on AusGroup. This latest development supports our investment thesis that blue-chips in the minerals resources sector are "un-freezing" capital expenditure plans. We believe order wins over the next few months from both the mining and the oil & gas industries will underpin AusGroup's earnings performance in FY10 and FY11.

Maintain BUY with S$0.70 fair value (14x FY10F earnings or 10x FY11F earnings). Refer to our report dated 19 Aug 2009 for more details.

Indofood Agri Resources – Raising TP to S$2.10 – maintain BUY

IFAR reported 2Q09 results that were slightly ahead of our expectations. On a YoY basis, net profit fell 4.4% to Rp. 682.4b; stripping out its biological revaluation of Rp. 593.2bn, we estimate net earnings declined by 27%. On a sequential basis, however, core net profit rose 23%. Revenue declined by 30% to Rp. 2.3b, but was up 15% sequentially, in line with CPO price trends.

IFAR also recorded a Rp. 240bn forex gain on the back of the strength in the Rupiah, which mainly pertained to its US dollar denominated loans. For its core business, gross margins did see a decline to 33.5% versus 1Q09’s 41.2%. IFAR also saw sequential strength on CPO prices, which rose 24%. IFAR was also able to raise average selling prices by between 5-10% over 1Q.

Going forward, IFAR has raised its ASPs by a further 5% in July, and this is expected to hold steady for the next 2 months. More importantly, we expect sales volumes to increase through the second half of the year, in line with seasonal factors, as cooking oil consumption is expected to increaser through the festival seasons. IFAR’s cost of production is also expected to decline on lower fertiliser and fuel costs.

On a longer-term outlook, the fundamental demand for palm products remains strong, both in Indonesia and globally. IFAR’s leading position in the Indonesian branded cooking oil market makes it a prime beneficiary of this. We are adjusting our FY09 core net profit forecast upward by 7% to Rp. 1,144.5b, or an EPS of S$0.115. This is still 6% ahead of consensus estimate.

We are raising our target price to S$2.10 from S$1.35, based on a re-rating of palm related stocks to around 18x on the back of higher CPO prices. We also maintain our Buy recommendation.

SSH Corporation Ltd: Affected by further inventory provisions and low demand

Impacted by low demand, steel prices and provisions. SSH Corporation (SSH) reported a 13% YoY fall in FY09 revenue to S$217.6m and a 44% drop in net profit to S$15.5m as the group felt the impact of softer steel prices, lower demand and provision of inventories write down. Results were below expectations due to the inventory provision as well as lower revenue in the last quarter which made up 20% of our full year estimate. Excluding the write down of S$9.7m, gross profit margin would be about 26%, similar to that of FY08's. Although other income rose 98% YoY to S$6.4m due to increase in rental income, other operating expenses increased by 225% to S$3.9m due to an exchange loss of S$1.2m in FY09. We also note that gross gearing decreased from 0.48x as at 30 Jun 08 to 0.29x as at 30 Jun 09 as bank borrowings fell with lower working capital requirements.

Steel prices have likely bottomed out. As steel prices bottomed out in May this year and have recovered since, it is less likely that the group should require further provision for inventory write downs. Assuming adequate provision and if steel prices continue to recover, the group may book revaluation gains, but this will not be reflected in the income statement but rather in the revaluation reserve. Steel prices have trended upwards, supported by strong demand from certain countries such as China which have taken advantage of low prices to stock up on inventories. we see that China started experiencing a recovery in iron and carbon steel products imports from February this year, near the trough of the global composite steel price index. Although SSH mainly caters to customers in Singapore, Indonesia and nearby countries, there is the possibility that the group may expand its reach in the Chinese market since it can leverage on the network of KS Energy and Aqua-Terra Supply.

Maintain HOLD. Management expects that FY10 will remain "challenging and competitive" but pointed out that if the rise in oil prices is sustained, it may induce more oil exploration which increases the demand for SSH's products and services. We maintain our fair value estimate of S$0.16 as outlook remains murky with relatively low earnings visibility. As such, our HOLD rating remains.

Wilmar - China holds the key

Re-affirm BUY, with 16% upside to revised PT of S$7 We are increasing our margin assumptions for the plantation and processing businesses. We are also boosting our FY10F and FY11F earnings forecasts by 10% and 13%, respectively. We reiterate our BUY rating on the stock with a new price target of S$7, for upside of 16%. Our SOTP valuation on a segmental basis suggests a fair value of US$31bn for Wilmar.

Investors have started appreciating integrated Wilmar Palm & laurics and oilseeds processing account for 75-80% of Wilmar’s business. In our view, the market still does not fully appreciate Wilmar’s evolution into an integrated agribusiness player. However, since the China IPO announcement, the stock has started to decouple from physical commodity price movements, indicating that the listing and adequate information flow should correct this opinion.

China listing to drive valuation for the company At S$7, the implied value of the standalone China business as a geographical entity is US$14.5bn (19x FY10F earnings of US$763mn), which is undemanding versus other agri players in the region. This China valuation would imply that the rest of Wilmar’s business is currently trading at only 12.4x, which we consider attractive. We think a higher valuation of 25-30x for the China business could lead to a further re-rating of Wilmar shares. However, Wilmar would have to significantly raise its earnings growth profile to justify richer valuations.

Leader in China, but growth subject to regulations Wilmar derives ~50% of its business from China. Though it is the leader in the oilseed processing and consumer segments, regulatory risks could constrain future growth. In our view, investments in newer segments like rice/water will take time to begin contributing meaningfully.

Kencana Agri: Fast forward

2QFY09 earnings slightly weaker than anticipated. Kencana posted a 399.2% q-o-q jump in 2Q09 net profit to US$2.5m, mainly due to recovery in FFB (Fresh Fruit Bunch) yields. Annualized, this was nevertheless slightly lower than our projection as the recovery in yields was not as sharp as we had anticipated. The group expanded by 1,227 ha in 1H09 (1,886 ha YTD) faster than expected and is targeting to plant of 5,000 ha p.a. from 10F onwards.

New TP yields 24% upside. We reduced our expectations of the group's 09F and 10F FFB yield by 11.4% and 7.9%, respectively, as we believe our previous targets were aggressive relative to what they had achieved in 1H09. This resulted in 6.6% and 12.4% cuts in 09F and 10F earnings. However, faster-than-expected expansion this year and sustained target thereafter would result in a higher net profit from15F onwards. Using DCF (WACC 13.8%, terminal growth rate 3%), this raised our TP to S$0.40.

Going international. The group's recent JV with Louis Dreyfus Commodities (LDC) to build a deep-water port in Balikpapan (capable of accommodating large-size vessels) is expected to extend Kencana＊s markets and reduce costs. The group has bought (through the issuance of shares) US$2.0m worth of land for the JV. It is expected to be fully operational by end of 2010F.

Rating upgraded to Buy. We are encouraged by the group＊s expansion target, now that it is able to secure funding for its capex plans. We believe the group should sustain double-digit growth over at least the next five years.

Straits Asia Resources 2Q09 results highlights

1. Good operational results. Revenue exceeded our expectations at US$175.6m (+8.6% YoY, +25.7% QoQ). Gross profit came in at US$81.0m (+25.9% YoY, +22.4% QoQ). Gross profit margin grew by 6.4ppt to 46.1% thanks to higher selling prices and lower fuel costs.

2. Net profit tainted by non-cash charge.Earnings came in below expectations at US$21.4m (-43.3% YoY, -39.6% QoQ) due mainly to a US$14.3m non-cash charge from warrant expenses. Excluding this, net profit would have met our estimates at US$35.8m (-5.4% YoY, +0.8% QoQ).

3. Outlook positive. The group is on track to deliver record earnings in FY09. It is confident of meeting its 9mt production target. Management remains positive on its outlook, citing recovering energy demand.

4. Good dividends, undemanding valuations.SAR has declared an interim dividend of 1.14 US cents, in line with its 60% payout policy. SAR trades at an undemanding 9.8x FY09F PER coupled with a relatively good 4.1% dividend yield.

5. Risks. Key risks to note are a deterioration of global energy markets and refinancing risk. SAR faces a repayment schedule of US$94m in 2009 and US$125m in 2010. It is in the midst of negotiations to refinance the loan.

El Nino is back; plantation stocks may outperform

This month, the Australian Bureau of Meteorology and the US NOAA declared that El Nino has returned and may last for the rest of 2009. El Nino is a hot weather phenomenon which tends to be negative for agriculture production, but good for prices. Already, we have seen signs of adverse weather - the Indian monsoon has been weaker than expected (delaying plantings of oilseeds and other crops) while rainfall in Indonesia and Malaysia has been below normal since May.

El Nino is typically negative for CPO (crude palm oil) production, but prices tend to rise sharply and overall it tends to be a net positive for plantation companies. For example, after the 1997-98 El Nino CPO production declined 2.7% YoY, but prices increased by 21%. Even if CPO production is not severely affected, there can also be indirect impacts on competingcrops – e.g. during the 2002/2003 El Nino, India experienced a severe drought and domestic oilseed crops failed, boosting CPO imports.

Typically, the negative impact on CPO production from drought only manifests 10-12 months later (although the impact on competing crops like soybeans is more immediate), but share prices and CPO prices react more quickly. For example, in 5 of the last 7 El Nino’s, plantation stocks out-performed the market by 5% - 93% during the event.

Even if El Nino has no significant impact on agriculture production, we remain bullish on CPO price fundamentals due to 1) Slowing CPO production growth (from yield stress and Malaysia’s replanting incentive); 2) Tight soybean supply; 3) Robust, inelastic global edible oil demand and 4) Increasing government mandates for bio-diesel, 5) Rising oil prices. Wilmar (Buy, Conviction List) remains our top pick in the sector, but we note that IFAR (Buy) has the highest earnings leverage to CPO (a 10% increase in CPO boosts 2010E EPS by 21%).

Noble - Riding the wave of recovery

Ripe for recovery. Global economic trends have improved in recent months and so has the outlook for Noble Group Ltd (Noble). The worst of the recession appears to be behind us with 2Q09 GDP figures showing QoQ improvements across several countries. These trends are in line with the International Monetary Fund's (IMF) projections, which predicted a bottoming out of global economies by 2H09 (exhibit 1). Credit markets have also started to thaw, helping to boost global trade flows. Noble, being a global commodities supply chain manager, will be a key beneficiary of the economic recovery.

Metals and Energy could spring positive surprises. Noble's Metals and Energy divisions could surprise on the upside given the resurgence of demand and prices in 2Q09 (exhibit 2). Metals and energy typically displayhigh sensitivity to real economic conditions, and we expect these segments to lead the economic recovery. Flow through effects of pump-priming initiatives, coupled with inventory re-stocking, has supported global activity in recent months. Going forward, robust demand from emerging economies such as China should continue to fuel demand for commodities.

Gloucester acquisition: a strategic move with earnings accretion. We have raised our FY09 and FY10 estimates marginally to reflect earnings accretion from Gloucester Coal. Noble has successfully gained control of Australia-listed Gloucester Coal with a 87.7% stake. This acquisition notonly boosts the group's earnings, but more importantly, secures Noble's strategic long term access to coal supplies. The acquisition is in line with Noble's strategy of increasing its assets, forms a good fit with the group's existing product portfolio, and should be easily digestible as we estimate that the acquisition cost formed no more than 2.5% of Noble's 1Q09 cash holdings.

Improving outlook; upgrade to BUY. Noble has consistently maintained a healthy financial position and managed to grow its volumes despite challenging operating conditions in 1Q09. The group will be announcing its 2Q09 results on 13 Aug 09, during which we will be paying attention to its segmental tonnage performance and balance sheet health. We rollover our valuations to blended FY09/10 earnings and raise our peg to 13x (from 10x), similar to levels seen in the 2003 recovery, bringing our fair value estimate to S$2.26 (previously S$1.62). We upgrade Noble to BUY on improved economic outlook. While we remain mindful of the risk of a double dip in commodities demand, the expected economic recovery in 2010 provides support for Noble's medium term performance.

Wilmar - It’s All About China

The continuous strength in China’s consumer spending would drive Wilmar International’s (Wilmar) growth and increase our optimism towards its prospects in China, leading us to upgrade its earnings forecasts and target price. We raise our target price from S$4.80 to S$6.50, based on a PE of 15x 2010 revised EPS of S$0.43. Maintain BUY.

Earnings revision. We raise our earnings forecasts for 2009-11 by an average of 33% to factor in higher sales volume and better margins for its soybean crushing and consumer pack in China.

Higher profit margin sustainable. Wilmar enjoys a higher and sustainable profit margin than its competitor due to its proximity to retailers and customers (transportation cost savings) and control on logistics to minimise leakages to a third party as well as business integration to maximise profit from its extensive marketing network. All these factors are likely to lead to at least US$40/tonne of cost savings for its downstream processing business.

Value creation from downstream listing. Unlocking value from the listing of its China operation in Hong Kong could potentially reap a special dividend of S$0.24/ share, assuming a 40% payout from the proceeds of the initial public offering (IPO). A listing in Hong Kong will pave the way for a China listing, which would further open up the domestic market for Wilmar, being a locally incorporated company.

Maintain BUY with a target price of S$6.50. Our new 12-month target price of S$6.50 is based on 15x 2010 PE and in line with Malaysia’s big-cap plantation stocks.

Indofood Agri - Powering ahead in 2Q09

Better 2Q09 prospects. 2Q09 CPO prices rebounded by 31.7% q-o-q; and at the same time, FFB yields are also expected to recover from tree stress q-o-q. We expect IndoAgri’s 2Q09 revenues to reflect these developments. We also estimate IndoAgri to book unrealised FX gains of c.Rp124bn in 2Q09 (from unrealised FX losses of Rp178bn in 1Q09), as the Rupiah exchange rate to the USD has strengthened from Rp11,575 as at 31 March to Rp10,208 as at 30 June.

09F-10F EPS adjusted by +0.6% and –3.9%, TP raised to S$1.75. We revised our earnings forecasts to reflect changes in IndoAgri’s volume growth estimates, cost structure, and selling prices. While these changes resulted in only minor EPS adjustments through to 2011F, the impact is more pronounced from 2012F onwards (vis-àvis our previous forecasts). Combined with a reduction in Indonesian risk free rate to 9.5% (from 10% previously), we raised the counter’s TP to S$1.75.

Integration is paying off. As we expect IndoAgri’s downstream business to be fully sufficient by 2013F and its sugar plantation and refinery to contribute meaningfully by 2012F, the group should continue to deliver double-digit growth from 2011F through 2016F. Given this prospect, we believe IndoAgri would be more than able to service and repay its debts. We forecast the group’s net gearing to settle at 37.1% by the end of this year; while interest coverage should remain at a comfortable 5.8x.

Wilmar International - Riding on the China euphoria

According to the South China Morning Post, Wilmar has chosen to list its China subsidiary on the Hong Kong market instead of Shanghai. The offering is expected by 1H 2010, and aims to raise US$3-4 bn. This suggests that Wilmar’s China subsidiary is valued up to US$14 bn. As its China business posted net profits of about US$630 mn in FY08, this suggests that Wilmar is aiming to list its China operations at a historical 2008 P/E of 22x. This is significantly higher than China market P/E averages of 17x in 2008 and 16x in 2009.

We estimate that 55% of Wilmar’s earnings are from China; of which two-thirds of the Chinese profits are derived from oilseed crushing and the remaining one-third from the consumer product division.

We believe that Wilmar’s China business should command a blended P/E of 19x, and its non-China business a P/E of 14x. This puts the new target price at SG$5.04 (revised up from SG$4.54). We maintain our NEUTRAL rating on Wilmar.

Golden Agri-Resources: Ex-Right Fair Value of S$0.35

Trading of rights and warrants. Golden Agri Resources (GAR) will begin to trade its rights shares (up to 1,764m) on 27 Jul and the warrants (up to 705m) on 28 Jul. As a recap, GAR initiated a rights cum free warrant issue to raise S$311m net proceeds to "pro-actively strengthen the balance sheet, financial flexibility and competitive position" of the group to support its growth, both internally and externally. After the issue, we note that its net gearing will drop from 9.1% as at end 2008 to just 2.1%.

CPO prices stabilizing after recent slide. The recent slide in CPO prices from an average of US$693 per ton in 2Q09 to around US$595 in Jul was due to the fall in crude oil prices below US$60/barrel as well as worries that the global economic recovery could be a long-drawn affair. This has also resulted in a fall in GAR's share price but it comes as no surprise as the group - being one of the largest palm oil producers in the world) - is susceptible to these fluctuations. While CPO prices have rebounded slightly over the past few days, the outlook for the CPO market remains hazy - supply is widely expected to rise in 2H0 while demand remains uncertain. Nevertheless, we do not expect CPO prices to fall below US$500/ton and should average around US$550-570/ton in 2H09.

Expect 2Q09 results to show good QoQ growth. In any case, given that the average CPO prices have improved from US$538/ton in 1Q09 to US$693 in 2Q09, as well as a very poor 1Q09 showing, we expect GAR results to show relatively good QoQ growth. On the topline, we are expecting a QoQ growth of 20%; however it would still be down nearly 40% YoY, given that the average CPO prices back then were around US$1004/ton. While net profit is expected to surge some 198% QoQ, it is likely to be down 82% YoY; again due to the sharply lower CPO prices.

Adjusting fair value to S$0.35. Although we are bumping up our FY09 earnings slightly by 1.7%, it is mainly due to higher interest income (after the rights issue), we are leaving our revenue number unchanged for now. Meanwhile, our ex-right fair value estimate has been adjusted from S$0.40 to S$0.35. Given the limited upside, we retain our HOLD rating. We would be buyers below S$0.30.

Indofood Agri - Considering Issuing bond by Stefanus Darmagiri?

Salim Ivomas Pratama, 90% owned by Indofood Agri Resources (IFAR) is exploring the possibility of issuing rupiah-denominated bonds amounting to about Rp1.0 trillion. The company plans to use the proceeds to refinance its existing debts. However, whether the bond issuance will materialise or not will depend on market conditions.

We believe the bond issuance is meant to refinance the company's short-term loans. This is in line with the company's strategy of increasing the long-term loan portion while reducing the short-term loan portion. As of 1Q09, about 41% of the company's loans were short-term loans and 59% were long-term loans.

Maintain BUY on Indofood Agri Resources.

First Resources: More value in store

More Indian consumption for world＊s cheapest oil. Despite the global recession, Indian consumers are enjoying world market prices for palm and soybean oil, the first time in a long while as they had long been subject to hefty import duties to protect domestic soybean farmers. Indian palm oil consumption is forecast to rise by almost 1 kg /capita this year from 4 kg/capita last year, after which, it may be hard to reduce from the new level.

Time to accumulate. With over 170,000 ha of land bank to fill, the group targets to achieve 10,000 ha of new planting p.a. Given this target, we now extend the group＊s new planting from 2009F until 2013F. Long-term incremental earnings from these expansions translate to higher valuation for the stock to S$0.80 from S$0.70. We see current price weakness as a good entry point to accumulate FR, which is the cheapest in our universe.

Normalized§ production pattern in 2H09. FR management pointed to a potential supply disruption between late August and late September, given a month of fasting in Indonesia and Malaysia, followed by 1-2 weeks of Eid holidays. At the same time, demand should seasonally pick up through October for Deepavali and mid-Autumn festival.

Stronger 2Q09 earnings. We expect the group's profits to rebound in 2Q09, mainly on the back of stronger IDR, which should work to reverse last quarter FX losses. The group had locked in prices between US$450 and US$500 in 2Q09 up from US$450 in 1Q09. Around 15% of its 2H09 volume had been locked in at US$600 (all FOB).

Indofood Agri Resources: A sweeter outlook

Adding growth from sugar plantations. Indofood Agri Resources (IndoAgri) expects to have a meaningful profit contribution from sugar plantations and milling from the end of 2011F. The group expects to have planted 18,600 hectares of sugar cane by then, preceded by commercial operation of its new 8,000 MT/day sugar mill in South Sumatra by mid-2010F. We expect IndoAgri's sugar revenues to top Rp1tn by 2012F ? the second largest revenue item after palm oil ? contributing roughly 9% of total EBITDA.

Price weakness presents buying opportunity. Notwithstanding an anticipated rise in palm oil inventory over the next few months, we believe seasonal weakness in CPO price is temporary. IndoAgri is now attractively priced and yields 17.4% upside given our TP of S$1.35. We reiterate our Buy call on the stock.

Raising prices. IndoAgri strives to maintain profitability and ? in line with rising CPO prices ? has recently raised its cooking oil selling prices. The group may have a second price increase this month, which will maintain EBITDA margin of between 5 and 10%.

Raising yields. The group has put in place better control on its operations in South Sumatra and replaced Lonsum management. This strengthens our view that further yield improvements are on the way.

Wilmar - Outgrowing its roots

Wilmar is the world’s largest crude-palm-oil refiner, with a 23% market share, and rising. It has delivered wider profit margin than its peers, through strong pricing power, good market insights and economies of scale. We expect 12- 16% YoY profit growth in its refining business from 2010, backed by increasing global demand for edible oils. The company sells its palm oil in bulk and uses its own plantations, which fulfil 8% of its refining-feedstock need, as an effective bargaining chip to lower overall cost.

Wilmar is the largest provider of branded cooking oil in China (44% market share) and benefits from a strong distribution network and production flexibility that stems from having its own crushing business. Market-sharegain will continue as the company has excess crushing capacity in a market where capacity addition is banned and demand is improving. In the longer term, the soybean business will grow with rising consumption of cooking oils in China and meat globally.

Wilmar can leverage its extensive cooking-oil distribution network, which spans 2,560 cities in China, to expand its consumer-product offerings. These currently include cooking oils, flour, rice and bottled water. It can raise funds through the proposed Hong Kong listing of its Chinese assets to realise this growth path. While our base case assumes 7% core EPS growth in 2009 and 20% in 2010, new successful products will trigger additional growth.

Our S$6.00 sum-of-parts-based target price implies 15% upside. The stock has rallied recently but remains attractive versus its merchandising & processing and consumer peers at 13.7x 10CL PE given the company’s dominant market position in almost all of its businesses and strong management team. An increase in free float from shareholder restructuring can result in a higher MSCI weighting and drive a stock rerating.

European 2Q09 Cocoa grind falls short of Olam's expectations

Brussels-based European Cocoa Association (ECA) recently reported that Europe's cocoa grind had fallen 11.3% yoy to 291,763 tonnes in 2Q09. The ECA's statistics cover most of the grinding industry in the European Union and Switzerland, and is a closely watched measure of cocoa demand. The results were below Olam's expectations as one day before the data release, Reuters had interviewed Gerry Manley, managing director of Olam Cocoa, who expected European 2Q09 cocoa grind to fall 8-10% yoy and global grind to be down 6%. Manley, head of Olam's global cocoa operations, attributed the low cocoa grind to falls in demand due to the global recession. He indicated that the financial crisis had been impacting demand from markets like Eastern Europe, and less premium chocolates were being used in markets like US. Manley expects a global cocoa deficit in 2009-10 aided by disappointing mid crop in the world's top producer Ivory Coast.

As mentioned in our recent downgrade note on Olam, the group's volume surge seen in Apr/May 09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession resistant, are also showing slight weakness.

While the weak demand for cotton, wood, wool and rubber can be explained by the weak global demand for industrial raw materials, it may be a concern to some that the relatively recession-resistant products of cocoa and dairy are also showing signs of weakness. Accordingly, it is logical to wonder whether Olam's other recession-resistant products could see weakness in future.

We reiterate our Sell on Olam for its high valuations and potential disappointments in certain product categories as mentioned above.

Golden Agri-Resources - Signs of production trends turning around

The worst may be over for Golden Agri’s (GAGR) production, which first started deteriorating significantly in Q408. To recap, GAGR’s FFB production declined by 24% YoY in Q408 and 15% YoY in Q109. Although GAGR explained that the contraction was due to weather issues and tree stress, GAGR’s production trends underperformed the sector during this period.

After a troubled Q109, yields and production appear to be improving. Yield started turning positive YoY in April. Yield was still negative YoY in March, although monthly trends were already improving significantly. We expect continued improvement in June/July as the effects of tree stress diminish and as GAGR addresses the bottlenecks and infrastructure problems caused by adverse weather.

We maintain our assumption that production contracts 3% in 2009. We prefer to wait to see if the turnaround in sustainable. However, if we assume production grows by 7% (in line with GAGR’s 5-8% guidance), our 2009 net profit forecast could be lifted by 11%. Aside from production, costs would start improving in Q309 as fertiliser bought at high cost in 2008 would have been drawn down.

Our price target is based on a sum-of-the-parts valuation where the plantations division is valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%.

Wilmar - Integrated and Dominant

With a strong presence in China and dominant palm oil processing capabilities in ASEAN, Wilmar is well positioned to benefit from the growth in Asia. The potential listing of its China business should help investors understand the group’s market positioning and unlock value for shareholders.

The group intends to leverage its strong distribution presence in China to drive growth in other product adjacencies like rice, flour and other consumer food products.Meanwhile the group continues to dominate the consumer pack space, with 45% market share, and maintains the leading share of oil seeds crushing volume in China. Wilmar’s China operations posted a net profit of US$630mn in 2008, making it one of the largest food companies in China.

With 300,00 ha of unplanted land, the group can continue to add to its current planted acreage of 225,000ha, driving volume growth. In addition, processing 40% of the world’s palm oil provides the group significant market intelligence to manage its risks.

Excluding liquid working capital, Wilmar’s gearing is only 0.07x. Following the aggressive expansion over the past couple of years, the pace of capex will likely slow. However the group is likely to pursue M&A opportunities.

The main risk to our price target stems from CPO price fluctuations. We see possible downward price pressure from: 1) a marginal impact from biological tree stress, resulting in higher-than-expected production, particularly from Indonesia; 2) larger- than-expected soybean production in Argentina and Brazil; and 3) more severe demand destruction from a prolonged global economic downturn.

Noble Group - Buy: Commodities Strong; Business Strategically Stronger

Returning to the company post Gloucester Coal deal — Following a period of restriction we are updating our numbers for 1Q09, the Gloucester coal acquisition and the rights issue.

Gloucester; an accretive and energy division catalyst — We think Gloucester will be accretive by c9% for 2010 earnings, based on consensus earnings. The deal will help catalyze value in the coal business. Management forecasts that it will own 20Mtpa of production in three years.

Oil and Gas ambitions in the eyes of management — Expansion and earnings growth remain a focus. Management believes that increasing exposure to oil & gas is paramount. We see two routes; organic resource development (high risk, high reward) or mature asset with life extensions acquisitions as proven in coal.

Revising earnings by -24% and -20% for ‘09E and ‘10E — A reflection of the outlook post the downturn in commodities. This is misleading as we expect a recovery in earnings through 2H09 with a supportive price environment and better medium term outlook following our recent commodity upgrades.

Reiterate our Buy; increasing our target price to S$2.2/s — Near-term trading could be volatile but as a play on China growth with a commodity bent, we think Noble is a name to be accumulating.

Risks near-term around the US$ — The key risk for the trading business is the US$ and if the re-stocking demand is not matched by real demand.

First Resources - Pressured by lower CPO prices

While we are positive on First Resources’ (FR) young age profile of trees and relatively low cost of production versus its peers, we are bearish on CPO prices in view of depressed economic conditions globally potentially affecting demand as well as potentially strong FFB production in the 2H. Hence, we are maintaining our NEUTRAL call, with fair value of S$0.60.

Young age profile of trees. FR’s weighted average age of plantings of 8.3 years is relatively young. In addition, 54.5% of its trees are at peak production age of between eight to 17 years and 14.5% of its trees (out of total planted area of 97,501 ha) are moving into the prime category within the next three years. This implies there is substantial growth to be realised in coming years, with future FFB and CPO production growth supported with minimal increases in costs/capex.
Low cash cost of production. FR has managed to maintain a relatively low cash cost of production of US$200/tonne (for nucleus) for FY08 (in spite of a rising cost environment) as well as in 1Q09. Management has indicated that they would try to maintain this level of production cost for FY09. This low cash cost of production would put them in good stead to weather the harsh operating environment of potentially lower CPO prices in 2H09, tight credit conditions and a slow economic environment.

No significant near term refinancing issues. With the majority of FR’s debt being non current in nature (99.5% of borrowings/debt securities repayable, about IDR2.1t, are non current), there is no refinancing pressure in the short term. This allows management some time before repayment is due, to strengthen its balance sheet and to pay extra attention to financial liquidity and cost management issues.

Potentially lower CPO prices in 2H. We are maintaining our CPO price assumption of RM1,900/tonne for FY09 (current CPO prices are hovering around RM2,300/tonne). Using a P/E of 10x FY10F earnings, our fair value for FR is S$0.60. We are maintaining our NEUTRAL call on the stock in view of our bearish outlook for CPO prices.

Olam - Set to regear for M&As and organic growth

Olam, a global supply chain manager, seems poised to ride agricultural demand growth driven by climate change, population growth and urbanization. Its on-the-ground presence coupled with its integration along the supply chain bode well for margin and volume growth. Olam stands to benefit as volume and prices improve. 1% rise in commodity prices or volume would improve estimated earnings around 0.4%.

Olam has addressed the gearing bottleneck via two equity placements totaling S$745mn, improving its adjusted net gearing ratio to 0.6x from a peak of 1.9x in December 2007. The improved gearing enables it to regear for organic growth and M&As which are expected to drive 25% of its future earnings growth. It has managed to secure 15 deals since 2007, totaling US$742mn. Meanwhile, it is reviewing 14 deals. Thus, we can expect more M&A moving forward, in our view.

Most of the concluded M&As are moving Olam up the supply chain. Management indicated future capital deployment will remain on the upstream division, securing volumes at lower cost and hence boosting margins. Up and midstream margins are usually 15-25% higher than downstream. Based on its track record, we expect future assets/business acquisitions to be shareholders’ value accretive. Net contribution margins have improved around 20bps per annum since FY02.

Our PO of S$3, based on a Gordon growth model, equates to a FY10E P/E of 22x (historical band: 8.2x to 38.4x) and P/B of 3.4x (1.1x to 6.6x). Current share price implies an ROE of 20%, 500bps below long term sustainable ROE of 25%. We expect the share price to continue to re-rate upward once management translates M&As into results and also as more M&As are announced.

Wilmar: Eyes HK Listing for China Ops

Eyes HK Listing for China Ops. Wilmar International (Wilmar) has been reported by Reuters as having hired three banks to handle what could be a US$3b flotation of its China business in HK - unnamed sources cited by the newswire said that the IPO is set for a listing late this year or early next year. While the group has declined to comment on the report, it had previously unveiled such plans to list 20-30% of its China operations in either HK or China to tap investor interest in its biggest market and to raise cash for acquisitions. In FY08, its China business turned in revenue of US$14.3b (49% of overall sales) and an estimated US$500m to its bottom line. Assets in China amounted to US$6.5b, or nearly 40% of its total assets.

Limited impact from lower CPO prices. Meanwhile, CPO (crude palm oil) futures in KL have recently hit a 13-week low, with the actively traded Sep contract falling 6.1% last week, unsettled by concerns of more bearish news on the horizon. The most worrying is the further deterioration of the fundamentals for the crop - industry watchers warned that the CPO stockpile could surge going into the high production period as foreign demand has been poor. However, we do not expect lower CPO prices to have much of a negative impact on the group although revenue may fall (mainly due to its palm and lauric business). On the other hand, a significant downstream player such as Wilmar may benefit from lower feedstock prices as it still sources around 60% of its requirements from third party plantation companies. In any case, we note that Wilmar has shown a consistent ability to manage the price fluctuations, often riding out the volatility with aplomb.

Maintain BUY with S$5.64 fair value. The latest news (though unconfirmed by the group) shows that the proposed HK listing of its China operations is on track. Based on its estimated US$500m bottom-line contribution, we believe that the US$3b flotation is not an issue, assuming a valuation of 20x and a divestment of 30%. However, we will hold off adjusting our numbers until we get more information about the structure and form of the proposed listing. Nevertheless, we are bumping up our valuations slightly from 18x blended FY09/10 PER to 18.5x, deriving a fair value of S$5.78. Maintain our BUY rating.

Indofood Agri Resources - Planting targets lowered as net gearing climbs

IFAR’s share price has more than doubled from S$0.60/share in Mar 2009 Following the doubling of Indofood Agri’s (IFAR) share price since March 2009, we think its valuation is unattractive and we downgrade its rating from Buy to Sell. Overall, we are negative on the plantations sector as we believe there is downside to CPO price in H209 due to an improvement in the supply/inventory situation.

IFAR has one of the highest geared balance sheets in the sector; with net debt of Rp4.6bn (US$453m) and net gearing of 0.41x as at March 2009, which is up from 0.35x in December 2008. Despite the gearing, we estimate EBIT interest cover to be 5.1x in 2009 which is still reasonable in our view. We also note that IFAR has scaled down its planting programme from a target of 20,000 ha pa last year.

The US$/S$ strengthened against the Rupiah since March 2009. Accordingly, we raise our EPS forecast for 2009/10/11 by 15% from S$0.081/S$0.083/S$0.084 to S$0.092/S$0.095/S$0.097. The key changes are: 1) higher Rp/US$ rate of Rp 10.5k from Rp9.8k; 2) higher Rp/S$ rate of Rp7.1k from Rp6.6k. Despite our EPS estimate raises, we believe valuations are unattractive.

Our price target is based on our sum-of-the-parts valuation where plantations are valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%. At our price target, the implied EV/mature hectare and 2010E PE are US$10.5k/hectare and 11x earnings, respectively.

Following a doubling of its share price since March 2009, we downgrade Indofood Agri’s rating from Buy to Sell. In our view, valuations are not attractive and our downgraded rating is also in line with our negative view on the plantations sector.

Olam - Positives reflected in the price; downgrade to Sell

Olam has outperformed the STI following its recent placement to Temasek (273m new shares at S$1.60) and the acquisition of SK Foods (US$39m). We believe much of the good news has been discounted after the share price surge. At 23x FY10E PER, 3.3x P/B, and 11.4x EV/EBITDA, Olam is not only trading at a sizeable premium to its peers, but it is expensive versus its own trading history. Sell.

We believe Olam’s share price strength comes largely from the hope of M&A activities and potential contributions from Temasek. This anticipation, we feel, has been overplayed, and the earnings dilution/contribution disconnect (i.e., immediate EPS dilution from the placement vs. the earnings lag from new acquisitions) shows that much has been discounted with the high valuations. M&A, while exciting, could raise overall risk as the number of moving parts increases.

Our recent company visit indicates that the volume surge seen by the group in April/May ‘09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession-resistant, are also showing slight weakness.

Our target price of S$2.00 is based on the Gordon Growth method and has been raised after factoring in the recent share placement. Assumptions: ROE of 19%, a long-term growth rate of 3% and COE of 10%. Upside risks include better-than-expected volumes in its products, market share gains and new products.

Wilmar International Limited - Positive datapoints underline our bullish view

It's not just the weather!: The ENSO Index remains in negative territory, hitting -10 in May-2009, pointing towards an increasing likelihood of an El Nino which the Australian Weather Bureau put at over 50%. While weather risk premium provides upside catalyst for CPO price, we reiterate that our positive view on CPO is not solely underlined by the weather alone.

Bullish signal from USDA report: The USDA report released yesterday was positive for soybean. Soybean plantings rose less than market expectations with acreage estimate of 77.48 million acres. The increase, though larger than reported in March, is not sufficiently large to obviate ongoing concerns over inventory stress, as highlighted by J.P. Morgan Global Soft Commodity Strategy team. The positive signal for soybean price is also expected to be supportive for CPO price.

Upcoming monthly CPO inventory data: The June monthly CPO inventory data for Malaysia is expected to be released on 10 July 2009 and is likely to show continued rise from 1.36 million MT in May-2009 to 1.6 million MT by Sep-2009 on the back of higher production season and gradual reversal of tree stress cycle. We have pointed out in our Plantations sector note on 22 June 2009 that this rise is largely priced–in given the over 20% fall in CPO price since May, and further reiterated the limited downside risks to CPO price on firmer crude oil price, tight soybean supply and rising weather risk premium (Plantations sector Alert on 29 June 2009).

Positive implications on Wilmar: These fundamentally positive datapoints continue to be strong catalysts for Wilmar. We have pointed out in our initiation note - Wilmar International Limited: Extended growing season on 22 June 2009 that a 10% increase in our CPO forecast would increase our net profit estimate for Wilmar by about 5.4%, as prices for refined products rise in tandem, and a high degree of cost pass-through could be achieved by the company. Separately, a steady uptrend in soybean price should also be slightly positive for Wilmar, as we note that the company does take its own view on commodity prices, although it hedges its soybean feedstock prices. The time interval between the import of soybean and the eventual sale of soybean meals/oil could boost margins for its oilseeds and grains business as prices move up. Evidently, oilseeds & grains PBT/MT improved to US$71.02 in 1Q08 in line with higher soybean and soybean products prices along with improvements in crushing margins. We reiterate our OW on Wilmar.

Indofood Agri Resources - Sturdy production in the next few years

Higher CPO prices in 2Q09 despite recent CPO price correction. Despite the recent price weakness, CPO prices (FOB Malaysia) still increased a significant 33% qoq to about RM2,575/tonne (for the quarter ending 19 Jun 09).

Sturdy CPO production in the next few years. We expect FFB production of IFAR to increase at a 3-year CAGR of 9% in 2008-11 as about 40% of its total plantation area is in prime age which can produce the highest yields and another 29% going into mature age. The company increased new planted area for palm oil by 26,346 ha in 2008. Coupled with a slightly improvement in OER and the completion of two new CPO mills in Kalimantan by 3Q09, we expect CPO production to increase at a 3-year CAGR of 10%.

Expect stronger revenue and sustainable margins in 2Q09. We expect IFAR to post stronger revenue in 2Q09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices.

The RSPO certification will help it penetrate Europe energy market. Last weekend, London Sumatra Indonesia (LSIP/BUY/Rp4,100), a subsidiary of IFAR, was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for its four mills and factories located in North Sumatra estates which covers about 50% of LSIP’s annual production. This certification will help the company to push its palm oil products to the European energy players. LSIP may also command a premium selling price of US$10-20/tonne for the CPO under RSPO certification.

Lower-than-expected production and higher demand in 3Q09 may cap price correction. CPO futures declined 6.7% wow to RM2,315/tonne on 19 June due to lower exports of palm oil from Malaysia, higher-than-expected palm oil inventory in Malaysia, and concerns of softer demand from India following aggressive buying from Indian importers. We believe the price correction may be capped by lower-than-expected production and higher demand at end-3Q09 following the festive season in major CPO consumer countries, such as Malaysia, Indonesia, China and India.

We expect net profit to decline 15% yoy to Rp1,056b in 2009 due to lower CPO prices, and increase 25% to Rp1,321b in 2010 on the back of higher CPO prices and production volume. Our CPO price assumptions for 2009 and 2010 are RM2,200/tonne and RM2,600/tonne respectively.

Olam International - A margin enhancing bid in SK Food’s assets

Olam has been awarded the assets of SK Foods, the second largest US tomato processor (dehydrates) under a Chapter 11 asset sale programme for US$39m. We rate Olam Neutral.

This purchase price is about a third of the assets’ estimated replacement value of US$130m and is in line with Olam’s expansion into food ingredients processing. Olam believes that this business can generate US$200m in revenue and EBITDA margins of 12–13%, ie, more than 2-fold its typical supply chain margin at steady state operations by FY12 or about 5% of the net profit forecast for FY12, with unleveraged ROE likely in the range of 20% plus. We expect FY10 will be near breakeven given limited time to complete contracts with growers & customers this season (legal completion expected in July).

This will expand its range of dehydrates – it already has a presence in garlic (Key Foods Ingredients in 2007) and onion dehydrates (DeFrancesco & Sons, also via a Chapter 11 sale in 2008) in the US. The dehydrates segment represents a value-add expansion for Olam’s nuts, spices and pulses segment (this segment contributed to 18% of Olam's profit pool in 1H09).

While Olam has continued with rather attractive but smaller-sized M&A deals (such as this one for SK Foods), tightness in the long-term credit market means that it has not yet re-embarked on large-scale M&A deals.

To that end, we note the most important benefit of Olam's proposed S$438m placement of 273.5m new shares to Temasek is financial – we anticipate that having Temasek as a 13.8% shareholder of Olam could improve its access to long-term debt financing, which we believe is a key factor that could help Olam’s plans to accelerate growth via acquisitions. This will be put forth for shareholders' approval on 29 June.

12-month price target: S$2.10 based on a PER methodology. Catalyst: Enhanced earnings contributions from the various M&A deals completed in the past 2-3 years.

Straits Asia Resources: Improving outlook

Energy markets tightening. Straits Asia Resources Ltd (SAR) has seen its share price more than doubled since its March lows, in tandem with the resurgence of oil prices. The impact of global economic stimulus plans has started to flow into the real economy, leading to tighter energy markets. Improvements in fundamentals bode well for SAR, as firmer coal prices will boost its revenue. Management holds the view that energy markets will continue to tighten in 2H09 and is optimistic that its FY10 output will be priced at more favourable levels than recent spot prices of around US$60 / ton.

FY09 output fully committed. Since our last update, SAR has entered into sales agreements for the remaining 27% of its FY09 output. We estimate a blended ASP of US$85/ton for its FY09 output, slightly lower than our previous US$87 forecast due to recent weak coal prices. Nevertheless, this is still above FY08's ASP of US$70.50/ton, putting the group on track to deliver record earnings in FY09. This is also well above its breakeven cost of approximately US$38/ton. Production volumes have picked up in 2Q09 following a seasonally wet and slow 1Q09, and we expect output to gain momentum from 2H09 onwards on the back of more favourable weather conditions and increased production capacity.

Increased production volumes to propel earnings. SAR has recently installed additional infrastructure at its mines. The enlarged capacity will enable it to produce up to 19mt of coal per year, more than double its targeted FY09 production volume of 9mt. Management targets to ramp up its production to 19mt by FY12, pending the resolution of forestry boundary restrictions at Sebuku. We expect growing production volumes to drive SAR's earnings in FY10 and beyond. A sustained recovery of energy prices will serve as an added boost to its earnings. Nevertheless, we are assuming a moderation of coal prices given that energy prices have fallen way below their peak levels attained in 2008.

Improving outlook; upgrade to BUY. We have adjusted our earnings estimates by -20% to +2% as we lower our FY09 ASP assumption and tweak our cost projections, but raise our ASP assumptions for FY10 and beyond. This lifts our DCF-based fair value estimate to S$2.07 (previously S$1.38). Given the stabilisation of oil prices and the improving outlook for global energy markets, we upgrade SAR to a BUY. Dividend yield remains attractive at 5.2%. Key risks to our assumptions include a reversal of energy prices and refinancing risk.

Indofood Agri Resources - Strong Production Coming Onstream

Strong FFB production growth in the next few years. We expect Indofood Agri Resources’ (IFAR) fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11. This is because about 40% of its total plantation area is at the prime age that can produce the highest yields and 29% is entering the mature age. Thus, we expect higher FFB production growth of 10% yoy for 2010 than that of 7% yoy for 2009.

RSPO certification will support penetration into European energy market. IFAR’s subsidiary London Sumatra Indonesia (LSIP) was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for four mills that account for about 50% of LSIP’s annual production. The certification would helpLSIP sell its palm oil products to European energy players or even command a premium selling price of US$10-20/tonne for CPO under RSPO certification.

Lower-than-expected production and higher demand in 3Q09 may cap price correction. CPO futures declined 6.7% wow to RM2,315/tonne on 19 June due to lower exports of palm oil from Malaysia, higher-than-expected palm oil inventory in Malaysia and concern over softer demand from India following aggressive buying from Indian importers. The price correction may be capped by lower-than-expected production and higher demand as at end-3Q09 following the festive seasons in major CPO-consuming countries.

Maintain BUY. We maintain our BUY call with a target price of S$1.45 based on 12x 2010F PE for mid-cap and integrated plantation players. Given our CPO price assumptions of RM2,200/tonne (-23% yoy) and RM2,600/tonne (+18% yoy) for 2009 and 2010 respectively, net profit is expected to fall 15% in 2009 and rise 25% in 2010 on higher CPO prices and production volume. The stock is trading at 2009 and 2010 PE of 12.0x and 9.6x respectively.

Olam International: Sustaining shareholder value

Yet another acquisition. Olam International had today announced that it had successfully bid for tomato processing assets of SK Foods LP and its wholly owned subsidiary RHM Industrial/Specialty Foods Inc. through a bankruptcy court auction held on 24 June 2009 in Sacramento, California. The bankruptcy court had also approved the purchase agreement made by Olam's wholly owned subsidiary, Olam Tomato Processors Inc. on 26 June 2009.

Distressed asset. The purchase amount is US$39 million (clean, with no associated debts or other liabilities). The bankruptcy court has stipulated a closing period of 11 days from the date of its approval, and hence the acquisition is expected to close on or before July 10, 2009.

Earnings accretive by FY12F. The acquisition represents an expansion in Olam's Spice & Dehydrates business with high degree of customer, channel and cost sharing; and adds to previous acquisitions of Universal Blanchers, KFI and the Firebaugh vegetable dehydration facility. Olam does not expect this acquisition to be earnings accretive in FY10; but hopes to achieve steady state revenues of US$200 million and EBITDA margins of 12-13% from FY12.

Buy call maintained. We are positive on the purchase, as it shows the group's sustained ability to create shareholder value. Our buy call is reiterated; while our TP is raised slightly to S$2.60, based on 18.0x CY10F PE.

Wilmar - Extended growing season

Initiate with OW, Jun-10 PT of S$5.80: Wilmar International Limited has transformed itself from a palm oil trading firm into an agricultural commodities conglomerate. Its over 500,000 hectares of plantation land bank, extensive processing facilities and wide distribution network position it favorably across the agribusiness supply chain, in our view.

China business outlook: The potential listing of Wilmar’s China business would help fund further growth in China. We estimate the IPO could add 8-53 cents to Wilmar’s share price (we assume 24 cents in ourSOTP valuation, from the potential listing of 30% of the China business at 18x FY10E P/E). Management targets potential synergistic M&As. We estimate the stock deserves a premium to its plantation/supply chain peers which are trading at c.12x FY10E P/E.

Consumption growth in emerging markets: Wilmar’s presence in China makes it more than a pure plantation stock. Its high-volume oilseeds and grains business caters to rising soybean meal demand in China. We estimate soybean meal consumption in China to rise by 6% Y/Y next year. Wilmar’s consumer pack oils remain leading brands in China, Indonesia, and India. We believe this business is comparable to branded China consumer names trading at c.18x FY10E P/E.

Favorable CPO price outlook: Increasing signs of an El Nino return put CPO production at risk. The stock-usage ratio is expected to reach 13.7% by Sep-09—the lowest since Sep-03. Furthermore, tight soybean supply from crop losses in South America provides price support.

Valuation, PT and risks: Our Jun-10 PT is based on sum-of-the-parts. We value Wilmar’s core business on a two-stage DCF (WACC of 7.5% and growth rate of 2.5%), and add 24 cents from the potential Chinese business listing. Our PT equates to 14.7x FY10E P/E. A key downside risk to our PT is a higher-than-expected output depressing CPO prices, while we see an upside risk from a possible higher valuation multiple than the 18x FY10E P/E which we have assigned to the China business.

Golden Agri-Resources - Adjusting for rights issue

Golden Agri share price will go ex of its proposed rights issue today. To recap, Golden Agri has proposed a fully underwritten 17-for-100 rights with free detachable warrants at S$0.18 per share. We are raising our net profit forecasts by 1-2% for FY09-FY11 to account for the net interest savings from the US$215m proceeds raise from the rights issue. However, we lowered our FY09-11 EPS by 8-13% due to the enlarged share base. Our target price is cut from S$0.48 to S$0.43 to account for the dilution from the rights issues. However, we are upgrading our call on the stock to Trading Buy from Neutral as valuation for the stock is now more attractive following the stock underperformance against the Singapore market. Since our last update on 5 June 2009, Golden Agri's share prices have tumbled 11% against the decline in the market of 2.4%. Key re-rating catalysts are potential earnings-enhancing M&A and lower than expected operating costs.

Olam: Share price has risen beyond fair value

We are downgrading Olam from NEUTRAL to SELL. With Temasek taking a 13.8% stake in Olam (pending Olam shareholders' approval) and the additional capital providing scope for more acquisitions, we have raised our target price from S$1.83 to S$1.90. However, the recent surge in Olam's share price has made it more susceptible to possible weakness in global equity markets.

Temasek to take a 13.8% stake in Olam. On 1 Jun 09, Olam announced the issue of 273.5m new shares at S$1.60 each to raise gross proceeds of S$437.5m. The shares will be issued to wholly owned subsidiaries of Temasek. These new shares represent 13.8% of the enlarged issued capital of Olam. Olam indicated that 80-100% of the proceeds will be used to finance new capital expenditures and 0-20% for general corporate purposes. We spoke to management who indicated that Olam would consider all products that could enhance its margin, and acquisition of plantations is also possible. Olam has a adjusted net debt to equity of 0.83x as of Mar 09, and this will fall to a proforma 0.31x after the placement to Temasek.

Olam share price is now 13% higher than on 29 May (last trading day prior to new share issue announcement). Whilst the additional funds will provide Olam with more muscle to make acquisitions, we believe the general weak global economies will limit organic earnings growth.

Our Olam fair value is raised to S$1.90. With the placement, debt levels will fall and equity holders will enjoy a larger share of Olam's value. However, the improvement is partly offset by our DCF model factoring in a higher WACC of 7.2% (from 7.0% previously), which is attributed to a higher risk free rate of 2.73% (previously 2.12%) and market risk premium of 7.4% (previously 6.7%).

Wilmar: Resilient integrated agri-business model

Resilient integrated agri-business model. Wilmar International Limited (Wilmar) is one of Asia's leading agri-business group, where its business activities include oil palm cultivation, edible oils refining, oilseeds crushing, consumer pack edible oil processing and merchandising, among others. And over the years, it has established a resilient integrated agri-business model which not only captures the entire value chain of the agricultural commodity processing business, but also enables it to extract margins at every step of the value chain, resulting in significant operational synergies and cost efficiencies.

Well diversified markets. Headquartered in Singapore, its operations are located in over 20 countries across four continents, with a primary focus on Indonesia, Malaysia, China, India and Europe. We understand that Wilmar currently controls about 25% of the world's CPO (crude palm oil) refining capacity and 25% of China's soy bean crushing capacity. Wilmar also has a 40% share of the global CPO sales and nearly 50% share of China's consumer pack edible oil market. In addition, it is also one of the largest edible oils refiners and a leading producer of consumer pack edible oils in India. It also intends to develop an integrated agri-business with experienced partners in West Africa.

Potential listing of China operations. Given its extensive network and business in China, Wilmar has plans to spin off its business there with a primary listing either in Hong Kong or China. According to management, it plans to float 20-30% of its China business, but did not rule out selling more. Benefits of the move include unlocking value for existing shareholders, the ability to expand into other areas with the China listco etc. We believe that it is a good move for the reasons mentioned by the company and we also see the potential spin-offs involving its other sizeable operations overseas.

Initiate coverage with BUY and S$5.64 fair value. Despite its integrated agri-business model, Wilmar remains subject to the volatile fluctuations in the prices of vegetable oil like soy bean and CPO, which remains a key risk for us. But given that cooking oil is a necessity and demand should be fairly inelastic, we believe it may be less of an issue for more downstream plays like Wilmar than pure plantation plays. As such, we initiate coverage on the stock with S$5.64 fair value (based on 18x blended FY09/10 PER) and a BUY rating.

Noble Group : Marginal dilution from placement

Placement to have minimal dilutive impact. Noble Group Ltd (Noble) has announced a placement of 84.7m new shares at S$1.52 per share. The new shares will enlarge the group's existing share base by a marginal 2.6%, and will raise net proceeds of US$86.2m, which will be used for general corporate purposes. Concurrent with the placement, major shareholder Noble Temple Trading Inc (in which Noble's CEO Mr Richard Elman has a deemed interest) will place out 36.3m vendor shares, representing 1.1% of Noble's issued capital. The placement shares have been priced at a 2.5% discount to the weighted average price from 11 to 12 May 09 prior to trading halt. Dilutive impact from the new share placement is insignificant - our FY09F EPS has been trimmed to 11.3 US cents from 11.6 US cents. NAV is expected to increase to 59 US cents from 58 US cents.

No pressing need for additional funds. Looking at its strong balancesheet, Noble has no urgent need for additional funds. The group's adjusted net cash position (cash and readily marketable inventories less debt) improved to US$376m in 1Q09 from US$358m in 4Q08. Available credit facilities remained ample at US$4.2b. According to management, funds raised from this placement will be used for general working capital purposes, and will come in handy should commodity prices rise. We reckon that additional funds will also strengthen Noble's position for future acquisitionopportunities, such as its ongoing bid for Gloucester Coal Ltd, which could cost the group US$281.4m. In addition, this placement, which was largely targeted at institutional investors, will serve to diversify the group's institutional shareholder base.

Reduce to HOLD on valuations. Noble has demonstrated its ability to manoeuvre harsh operating conditions by delivering a strong set of 1Q09 results with volume growth seen across all its segments. Nevertheless, its outlook remains highly dependent on the recovery of the real economy, which remains unconvincing at this juncture. In view of the recent rally, we are adopting a more cautious stance on the stock. We have tweaked our fair value estimate to S$1.62 (from S$1.66) to account for dilution. Given the limited upside to our fair value estimate, we reduce our rating to HOLD.

Straits Asia Resources: Heating Up

Coal price trends upward. Underpin by recent roundup in oil price, we believe that coal price is set to follow suit as demand for coal remains strong. Our channel checks with major coal producers in Indonesia suggest that demand for coal is still robust, as the increase in output so far in 2009 has been absorbed by the market. Latest coal price at US$71.9/ton is 15% higher than its lows back in March 2009.

Main beneficiary of strengthening coal price. SAR's FY09 earnings will remain strong, driven by improvement in sales volume (+17% y-o-y) and sales price (+13% y-o-y). SAR has sold and priced 6.5mn tons of its FY09 coal deliveries at US$114/ton, thus cementing our optimism that it will achieve a blended average sales price of US$78/ton for FY09.

On track expansion plan. SAR management is continuing its effort to boost production by enhancing its infrastructure capacity. The company aims to achieve a capacity of 20mn tons p.a. and currently the installed infrastructure can attain production of 19mn tons p.a.

BUY with TP of S$2.26. Our target price was derived using the DCF methodology with WACC assumption of 11.1%, risk premium 5% and risk free rate of 9.5%. Reiterate BUY.

Timetable of the Rights Issue for Golden Agri-Resources

Golden Agri-Resources Ltd r proposed underwritten renounceable rights issue of up to 1,763,739,384 new ordinary shares in the capital of the Company (“Rights Shares”) at the issue price of S$0.18 for each Rights Share, on the basis of 17 Rights Shares for every 100 existing ordinary shares.

Shares trade ex-rights : 25 June 2009 from 9.00 a.m.
Books Closure Date : 29 June 2009 at 5.00 p.m.
Despatch of the OIS and application forms : 2 July 2009 and letters to Entitled Shareholders
Commencement of trading of “nil-paid” Rights : 2 July 2009 at 9.00 a.m.
Last date and time for trading of “nil-paid” Rights : 10 July 2009 at 5.00 p.m.
Last date and time for splitting Rights : 10 July 2009 at 5.00 p.m.
Last date and time for acceptance of and payment : 16 July 2009 at 5.00 p.m.
for Rights Shares with Warrants (at 9.30 p.m. for electronic applications)
Last date and time for renunciation of and payment : 16 July 2009 at 5.00 p.m. for Rights Shares with Warrants
Last date and time for application and payment for : 16 July 2009 at 5.00 p.m. excess Rights Shares with Warrants (at 9.30 p.m. for electronic applications)

First Resources - 1Q09 in a Snapshot

FR's CPO ASP in 1Q09 declined 36.7% YoY to Rp4,843. Due to accounting recognition of sales upon delivery, sales vol. also dropped 6.7% YoY to 78.5k tons (21.7% Citi FY09E) despite higher CPO prod'n. Consequently, 1Q09 total rev. fell 41.1% YoY to Rp432.2bn. (16% Citi FY09E; 19% Consensus).

FR has a relatively young plantation profile (8.3 yrs avg. age). Hence, unlike most planters, negative impact of so-called biological slowdown from the more mature trees was cushioned by the yield improvement of its maturing trees. CPO production volume increased 7.4% YoY to 77.3k tons. (22.3% Citi FY09E).

In accordance to the group's policy, the group performs valuation of its biological assets on a half-yearly basis. Hence, no gain/losses arising from changes in valuation of bio assets in 1Q08 and 1Q09.

Selling expenses decreased by 83.3% to Rp7.9bn following Indo's government decision to scrap the CPO export tax towards the end of 08.

As the rupiah weakened from Rp10,950/US$ at end 2008 to Rp11,575/US$ at end of Mar-09, FR incurred forex losses of US$ Notes of Rp46.4bn and Rp26.6bn market-to-market losses from cross-currency swap. The cross-currency swap was done in Nov-07 to convert IDR bond to a synthetic USD obligation with competitive interest expense of 7.4% fixed for 5 years.

Given above factors, overall NP declined 81.8% YoY to Rp57.4bn (7% of Citi's FY09E; 8.7% consensus). But at the EBITDA level, FR's 1Q09 EBITDA of Rp217.8bn accounts for 16.4% of Citi's FY09E and 17.7% Consensus.

We enter 2Q with more optimism against a backdrop of a firmer CPO price environment and a stronger rupiah. Low stock inventory in Malaysia, soybean prod'n/export issue in Argentina etc should provide support to CPO prices. To put things into perspective, Apr avg. CPO price stood at US$692/t vs. Mar avg. of US$556/t vs. YTD avg. of US$592/t vs. 4Q08 avg. of US$450/t. Current CPO price still hovers at >US$800/t level. As for the rupiah, 1Q08 avg. of Rp9,258/US$ vs. 1Q09 avg. of Rp11,614/US$ vs. current ave. rate of Rp10,840 (since Apr-09).