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%.

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