Golden Agri announces rights issue to raise S$311m

Golden Agri Resources (GGR) announces 17-for-100 rights issue at S$0.18/share, representing about 60.0% discount to yesterday's closing price or 56% to the theoritical ex-rights trading price of S$0.41.

The right issue will be atttached with 2-for-5 warrants with 3-year maturity date and at an exercise price of S$0.54/share.

The exercise from the right issue will raise fund approximately S$311m (after deduction of estimate expenses), while the exercise of warrants will raise fund of S$381m (assuming all the warrants exervised). About 80% used of the right and warrants proceeds to support company's business through organic growth as well as through external acquisitions, while remaining 20% would be used for working capital. This right issue figure of US$311m accounted about 7% of market capitalization.

Flambo International Limited, together with nominees and custodians, which hold a 48.6% stake in GGR, have undertaken to fully subscribe for their entitlement of rights units.

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Indofood Agri Resources: Raising CPO price assumptions

CPO prices raised on tighter supply of soybeans. While we still expect palm oil prices to moderate in 2H09 in line with seasonally higher production, the drop may be lower than previously expected ? due to lower than expected Argentine soybean production. Higher forecast soybean prices and tight palm oil stock/usage ratio hence prompted us to raise our FY09F and FY10F CPO prices to RM2,300 and RM2,300 from RM1,900 and RM2,000, respectively.

FY09F and FY10F EPS raised by 7.3% and 11.6%. With CPO price upgrades, we raised the group's cooking oil and margarine prices by more moderate rates of 9-14.8%, as fully passing on raw material increases may bear consequences on IndoAgri's market share. The group's cost of third party CPO purchases would, nevertheless, increase proportionately to CPO prices. Along with cuts in Lonsum's seed sales, IndoAgri's FY09 and FY10 EPS forecasts were, hence, raised by 7.3% and 11.6%, respectively.

Buy call maintained, TP raised to S$1.35. The above changes were reflected in our revised valuation (based on DCF, WACC 12.5% and terminal growth rate 3%), which now yields a fair value of S$1.35. We continue to like IndoAgri's dominance in the Indonesian edible oil market and decent own CPO volume growth potential, which should continue to augment its downstream margins going forward. Maintain Buy.

Wilmar - China listing plan overshadows 1QFY09 results

Palm & laurics drives 1QFY09 results; ahead of expectations Wilmar's 1Q net profit of US$380m, up 11% YoY, was ahead of DB's ex-pectations. This was due to stronger-than-expected contribution from the palm & lauric division (PBT US$55.15/tn vs. US$27.09 last year). Timely purchases of raw materials i.e palm oil,drove margins - unsustainable in coming quarters. Revenue was weak, down 31% YoY to US$4.95bn.

Why it is important to be 'more Chinese' when growing bigger in China Wilmar's intention to list its China operation drew most questions at the analyst briefing. Management hopes to list its China operations (c.U$600m in profits in FY08, formidable dominance in basic food distribution & pro-cessing - #1 positions in oilseed crushing, edible oil processing, consumerpack oils, specialty fats & oleo-chem, growing rice & flour merchandiser) in HK this year. This exercise should 1) unlock value of its China operations - management believes a HK listing would accord a higher valuation, 2) allow Wilmar to have a stronger Chinese 'identity' at a time when food security is of increasing importance and 3) offer Chinese institutions the opportunity to own part of China's leading basic food processor and mechandiser.

Listing could raise c.US$4bn; or >US$0.30/share dividend Wilmar intends to list 20-30% of its China operations. Assuming a 20x PER multiple (high end of Chinese food operators), the listing could raise US $2.4-3.6bn, we estimate. Wilmar intends to return to shareholders a portion of the proceeds in the form of dividends.Despite trading at 20-40% valuation premium against global peers, an accelerated listing timeline in combination with a potential sharper-than-expected recovery in the Chinese economy could lift valuations beyond fundamentals in the near term.

Golden Agri-Resources Ltd - Rights issues potential leads to uncertainities

Golden Agri's 1Q09 core net profit of US$9m was below expectations, making up only 5% of our FY09 forecast and 3% of consensus. The poor results were due to lower-than-expected FFB production from its own and plasma estates. We are negative on its potential rights issue as it will be EPS-dilutive. Also, the group has no firm acquisitions that would require funding and gearing was low at only 0.09x as at 31 Mar 09. We are cutting our FY09-11 net profit forecasts by 6-15% to account for 1Q's weaker-than-expected FFB yields. We are reducing our target price to S$0.39 from S$0.46 to incorporate our earnings downgrade and a lower target P/E of 11x (from 12x). Following the stock's recent outperformance against the market, the poorer-than-expected 1Q results and our negative take on the potential rights issue, we downgrade it to Neutral from Trading Buy.

Golden Agri-Resources - Hang in there

Golden Agri's share price has risen more than two-fold since November 2008 and we believe it is no longer cheap. We believe the weak 1Q09 result, due to adverse weather, was a temporary setback and will be reversed. We are positive on CPO prices and forecast an average price of US$700/t (vs US$650/t) for 2009.

Golden Agri reported poor 1Q09 numbers on Friday. Net profit fell 94% yoy to US$8.46m, 98% short of our full-year forecast and 58% below Bloomberg consensus. Revenue collapsed 44% yoy to US$412m. Gross profit fell 76% yoy to US$63.4m, vs US$264.6m in 1Q08. However, adjusting for non-cash gains, operating earnings rose 32% qoq. So, the results were not as dire as the headline numbers suggest. The company also announced that it is considering a US$200m rights issue to fund expansion. This is despite Golden Agri’s 0.09x net gearing as at 1Q09 and its US$138m cash balance.

CPO production is suffering in parts of Indonesia due to adverse weather conditions. Drought-like conditions have led to poor yields for Golden Agri. The 17% fall in CPO production was caused by a 24% fall in CPO yield and a 24% fall in FFB yield. We were expecting a 15% rise in CPO production for the year. The loss of production was pronounced in the drought-hit regions of South Kalimantan, East Kalimantan and Lampung region, according to management. Hence, this may not be representative of the whole market.

We increase our DCF-based target price for Golden Agri to reflect our higher CPO price assumptions. However, we lower our earnings estimates, due to the lower-than-expected CPO production. We expect the drought in parts of Indonesia to depress CPO production by 5% in FY09 to 1,610 tonnes. Although we remain positive on CPO prices and the overall sector, we believe Golden Agri is now close to its true value, with the share price up two-fold since November 2008. At 12.7x FY09F PE, we believe it no longer presents an undervalued opportunity. Thus, we downgrade to Hold (from Buy).

Olam earning ahead of consensus expectations

9MFY09 earnings 80% of our FY forecast. Olam booked 3QFY09 net profit of S$87.0m (-15.8% q-o-q, +56.1% y-o-y), which would bring 9MFY09 earnings to S$205.4m (+99.7% y-o-y) ? well ahead of our and consensus forecasts. However, this was mainly due to gains from repurchase of CB, amounting to S$80.5m for 9MFY09 and US$24.6m for 3QFY09.

Outside gains, 3QFY09 earnings slightly below expectations. Stripping the gains, 9MFY09 net profit would have come in at S$124.8m or around 7% below forecast on annualized basis. Performance was mainly dragged by slightly lower than expected net contribution/MT across the board. 3Q09 sales volume declined by 12.2% q-o-q; although we understand that 4QFY09 volumes had bounced back strongly.

FY09F and FY10F core EPS (fully diluted) lowered. Accounting for lower net contribution/MT and slightly higher volumes (+2.4%) for the full year, we revised our FY09F and FY10F core EPS (fully diluted) by -8.9% and -2.8% to 10.0 S cents and 13.5 S cents, respectively.

TP updated on higher PE target, buy call maintained. We now peg our PE target for the counter at 13.4x CY10F PE (representing 10% premium to our current CY10F STI PE target of 12.2x). Based on our revised CY10F EPS of 15.2 S cents, this yields a revised TP of S$2.05/share. Maintain Buy.

Wilmar - Raising Estimates and Target Price Post Briefing

Raising net profit estimate and target price — Net impact from our revision in PBT/tonne and volume assumptions for the merchandising & processing and consumer products division result in a 13%-16% increase in FY09E- FY11E net profit estimates. In line with the increase in earnings and pegging a higher P/E multiple for consumer products segment (based on current sector average) our SOTP valuation has also been raised by 22% to S$5.30.

Revising upwards merchandising & processing margins — Given strong 1Q09 performance, we are adjusting upwards our PBT/tonne estimate. We do not expect margins in the following quarters to be as good as 1Q but our FY09E PBT/tonne appears conservative at this juncture. For palm & laurics, we have raised our assumption from US$22/t to US$30/t. While for oilseeds & grains we have raised our assumption from US$23/t to US$29/t.

Raising margins for consumer products too — PBT margin for this division was exceptional at US$106/t (the highest ever achieved historically). Again, we do not expect 1Q09 margin to be sustainable. The higher margin in 1Q was due to lower feedstock prices. We are revising upwards PBT/tonne for this division to US$55/t from US$38/t previously.

Lowering sales volume assumption — We are revising downwards sales volume by 4% for the palm & laurics segment. Volume was down by 16% in 1Q09 as management adopted a cautious risk management stance following increased industry defaults at end-2008. We still expect a recovery in volume in subsequent quarters and now assume a 10% growth in FY09E. We are also cutting our sales volume assumption for consumer products by 15%.

Listing in China — Wilmar plans to list 20-30% of its China business. This is to unlock shareholders value and, according to management, is a strategic plan to have Chinese investors participate in the growth. China contributed close to US$600m in profit last year (40% of group profits). We believe Wilmar could potentially raise US$2.4-3.6bn assuming 20x P/E and between US$3-4.5bn if assuming a P/E of 25x. The cash raised could be used to pay out more dividends or for expansion. Preference would be to list in Shanghai (takes a longer time) but we believe management is realistic about the situation and might list in Hong Kong instead which could be as soon as 6 months down the road.

Noble Group - Diversified commodity proxy to global recovery; Buy

Noble, a global supply chain manager, seems poised to ride the commodity and economic recovery in 2010. Our economics team expects global GDP to rise from - 0.6% in 2009 to 3.3% in 2010. Infrastructure development should revive and thus boost steel demand. As volumes/prices improve, Noble should benefit. Every 1% rise in prices/volume would improve earnings by ~0.5% (Fig. 4, sensitivity analysis). We also maintain OW-30% recommendation on NOBGRP '13s and '15s.

Noble can spin-off an integrated chain as a separate entity to enhance share-holder value. A prime candidate, in our view, is the soybean supply chain, which links farmers in South America to consumers in China and India. Value accretion, could range from S$0.05 to S$0.16/sh. The recent bid for 21.7% of Gloucester Coal, if successful, also provides a platform for it to list its Australian coal assets.

Noble is transitioning from an asset-light trader to an asset-medium, integrated supply chain manager. This should help it secure volumes at lower cost, boosting margins. We see earnings CAGR of 37% over the next three years, driven by tonnage growth of 6-10% and net margin recovery back to near peak levels. Our sensitivity analysis shows a 10bp expansion in margins boosts earnings by 1-3%.

Our PO of S$2 (Gordon growth), equates to FY09E P/E of 14x and P/B of 2.2x, 15% and 20% off peak, respectively. The stock recently corrected due to a place-ment that diluted earnings by 2.4%. We believe this presents a buying opportunity as Noble’s underlying fundamentals and long-term growth potential are strong.

Golden Agri Resource - Fruits to return - Sell to Buy

1Q09 is likely to have been the worst operating quarter for Golden Agri. We expect FFB yields, which were at 3 year lows of 17.7% in 1Q09, to rise to 21.6% in 2009 as weather conditions improve and the effect of the “tree stress” from the 2006 drought dissipates. Golden Agri owns some of the best managed estates with some of the highest FFB yields in the industry. We also expect significant reductions in the company’s operating costs from 4Q09 onwards as the company will have run through its costly fertilizer inventory.

In light of the stronger than expected demand for edible oils and the lower than anticipated supply of soybeans from a poor planting season in Latin America, we are upgrading our CPO price forecasts from US$500 to US$650 in 2009 and to US$700 in 2010. We still expect CPO prices to drop and average US$690/ton for the remainder of the year as new supply will come on stream in 2H09. However, these new CPO prices lead us to increase our FY09 & FY10 net profits estimate by 28% and 80% respectively.

The company announced that it is considering doing a rights issue to raise US$200m. We see this as a negative overhang on the stock as it could dilute the share base by 8% and we don’t see a need for a rights issue here given that the company’s gearing is only 9%. Only if it were to use the money for an accretive acquisition would a rights issue make sense.

As a result of the 200bps drop in our Indonesian risk free rate assumption, and our earnings upgrade from higher CPO price expectations, we are upgrading our DCF-derived target price from S$0.21 to S$0.45. We believe the stock is attractive at 10x FY10CL and an EV/EBITDA(10CL) of 6.5. After accounting for the possible rights issue, the stock still holds 11% upside (S$0.42 TP). Upgrade from SELL to BUY.

AusGroup Ltd: Acquires access services business

Acquires access services business. AusGroup Ltd. is acquiring Modern Access Services, which provides access services to construction and maintenance programs in the mineral resources, oil and gas and industrial sectors. It has operations in Australia, Singapore, and Thailand. AusGroup's order book will increase from A$251m to A$455m after the acquisition. Costs A$15m to A$19.2m. AusGroup will pay A$15m in a combination of cash (A$10m) and new shares (A$5m). The cash payouts will be funded through a combination of existing cash (A$21.4m as of 31st March) and debt facilities. Additional amounts may be payable subject to Modern Access meeting certain EBIT milestones over FY10-FY12 of up to A$4.2m up to a maximum of A$19.2m.

No track record but large order book. Earnings data for Modern Access is limited and stale. For FY08, Modern Access generated revenue of A$0.3m, and incurred a loss before tax of A$1m and loss after tax of A$0.7m. As at 30 June 2008, Modern Access's NTA is A$3.3m. We estimate that AusGroup is paying between 2.7x to 5.8x FY08 NTA for the company. Note that Modern Access was incorporated in January 2008, so these figures reflect less than six months of operation as essentially a start-up. With no real track record, we believe AusGroup is paying for the target's A$203m order book, its management, and a client base that includes Woodside, Exxon Mobil and MCC Mining.

Revising estimates. We have adjusted our earnings estimates based on the maximum 14.4m shares issuable. We estimate that Modern Access contributes about A$58m (29% of its order book) to FY10F revenue at a NPM of 3.6% (versus our 4% NPM estimate for the existing business). Success TBD. Several key uncertainties exist. The target's limited track record is offset in part by a large order book and blue-chip clientele. AusGroup's own acquisition track record is choppier. The 2006 buy Cactus Engineering has been a disappointment (in our opinion) with orders and performance below expectations. AusGroup's new management has enjoyed some success in overhauling the company's execution capabilities and perhaps it is unfair to judge them on past deeds. Still, that overhaul is a long-term work in progress and there are execution risks for new business. Our S$0.51 fair value estimate (prev. S$0.55) is pegged at 11x FY10 earnings - down from 13x previously to reflect increased execution risks. Maintain HOLD.

Wilmar International - Premium valuation for superior business model

We are initiating coverage on Wilmar International with a BUY recommendation and a target price of S$5.70. While Wilmar’s share price has outperformed the market YTD, we believe that there is still further upside, with earnings outperformance and unlocking of value by listing its China assets in Hong Kong or Shanghai.

Wilmar is Asia’s leading agribusiness group, and second largest stock by market capitalisation on the SGX. It is the world’s largest player in the palm and laurics market. It is also has a market leading position in the edible oils market for both the burgeoning economies of China and India.

Wilmar now generates some US$29b in sales and recorded a net profit of US$1.53b in FY08. While we expect lower earnings of US$1.38b in the current financial year from lower commodity prices, the longer term growth story is intact. We are forecasting a relatively staid 3-year earnings CAGR of 5% in the current economic climate, but this is ahead of consensus. We believe the market may raise its outlook on a recovery in China and India.

Wilmar has the most profitable and scalable business model amongst its SGX-listed peers. It has an established distribution network that it can use to grow its existing and new businesses. We are therefore assigning a premium valuation of 18x FY09 PER to the company, which implies 25% upside from its current share price level.

Wilmar may also unlock further shareholder value by listing its China assets in either Hong Kong or Shanghai, where premiums for good quality consumer businesses are significantly higher. According to our calculations, such a move may value the company at US$28.2b, or S$6.33 per share.