Global Palm’s expansion to slow down in 2012

Slow planting continues in 3Q11. Global Palm Resources recently reported its 3Q11 results, which came in as expected, such that 9M11 revenue of IDR266.3b met 75% of our full-year forecast, while net profit of IDR48.5b met 79% of our FY11 estimate.

However, the pace of its plantation expansion continues to remain slow in the Sep quarter, as GPR only added 176 ha of new planting. YTD, the group has increased its new planting by around 621 ha, bringing its total planted area to 12,849 ha. And as mentioned before, unless GPR can aggressively step up its 2H planting program, it will risk missing its 1.6-1.7k ha target. And from our latest update with management, GPR expects to just add 1k of new planting this year. But even then, it may still be a tall order as GPR would need to achieve 379 ha of new plantings in 4Q11.

Not expecting much expansion in 2012. Management explained that the slowdown in new planting is an industry- wide trend, arising from Indonesia's two-year moratorium on new permits to clear primary forests (as part of a climate deal with Norway), and greater public and NGO scrutiny over new land opening. And because of this, GPR has further lowered its new planting target for 2012 to just 770 ha. Meanwhile, we note that the company has also not made much progress in its effort to acquire plantations to expand its operations.

Management noted that some of its preferred acquisition targets have failed to meet GPR's requirements after performing the necessary due diligence. In any case, GPR intends to continue searching for suitable targets that can fit into its "cost competitive" structure. As before, management seems more interested in acquiring companies with available land to add to its land bank at this moment rather than those with large existing plantations.

Maintain HOLD with reduced S$0.195 fair value. In view of the slow expansion so far and also the muted new planting target next year, we have reduced our FY12 revenue forecast by 9.3% and earnings by 8.4%. Applying an unchanged valuation of 10x against its FY12F EPS, versus blended FY11/ FY12F EPS previously, our fair value drops to S$0.195 from S$0.21. Maintain HOLD. Key risks include a sharp depreciation in IDR against SGD, a sharper-than-expected fall in CPO production (due to weather) and/or CPO prices.