Has CPO production bottomed in 1Q09? Despite the volatile commodity prices outlook, management believes that the demand for CPO, being the cheapest edible oil, is supported by core demand from the edible oil and oleo-chemical markets. Hence, it is keen to both expand its high-margin upstream business and select downstream capabilities and distribution. It expects to spend US$225m in capex this year. Management is also confident that GAR has seen the bottom of its CPO production, as the worst of the tree stress (due to the drought in 2006) has passed and its yields should start to normalize. Nevertheless, it has retained a tinge of caution as it has scaled down its new planting target from 50k hectares to 30k.
Possible rights issue overhang. Separately, on report that GAR has appointed BNP Paribas and Credit Suisse to raise US$200m via a rights issue, it clarified that it has not given the mandate yet. Management admits it is in talks with several investment banks on the possibility as it feels that trying to raise funds via debt is still difficult and expensive. Management adds any additional funds would come in handy when "opportunities arise". Assuming that GAR is looking to raise that amount, the potential dilution is at least 7%.
Downgrade to HOLD. Due to the dismal 1Q09 results, we have pared our FY09 earnings by 22.7%, but our fair value remains at S$0.40 based on 10x FY09F PER (vs. 8x previously - in line with the general re-rating of the overall market). But given the potential overhang from the rights issue as well as the limited upside, we downgrade our rating to HOLD.
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