Golden Agri Resources facing a slow growth harvest

The Indonesian government announced a change in export tax rates for CPO products to be made effective on 15 September 2011 in a bid to encourage the development of downstream industries in Indonesia. Under this new tax regime, taxes on refined CPO products (RBD Palm Olein, RBD Palm Oil) were slashed in all price categories while taxes on crude palm oil (CPO) rose on average.

The change in tax rates benefits Indonesian refiners as it lowers export tax paid on their refined products, resulting in a significant price advantage over their Malaysian counterparts. Upstream producers also stand to benefit, as downstream players will be willing to pay higher domestic CPO prices to secure their CPO feedstock. Being both a refiner as well as producer of crude palm oil, we expect Golden Agri to benefit from the change in export tax structure. Indeed, management believes that it would benefit from this change and expect the full impact to be realized in 1Q12. However, we note that Indonesia may review the new CPO export tax structure due to pressure from Malaysia and India, both of whom are anxious to protect their domestic refineries.

Production growth expected to slow but should be supported by favorable age profile. After 9MFY11 FFB production grew strongly by 20% and 9MFY11 palm products grew 24% Y-Y, management expects production growth to slow to 5% in 2012.We believe this is due to the high base in 2011 (from extremely poor weather in 2010) and concerns about the possible effects from La Nina.

Golden Agri possesses a rather favorable age profile with a weighted average age of 12 years. Furthermore, it does not have a very bipolarized age distribution with a good concentration (20% as of 3Q11) of its palm plantation between the ages of 4 to 6 yrs. We think that when this age group “migrates” into the prime age group (7 to 18 years old) over the next two to three years, it should more than offset the proportion of total plantation “migrating out” of the prime age group. The proportion of total planted area in the prime age group should then increase, thereby supporting overall yields