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.
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