Golden Agri-Resources hit by falling CPO prices

GAR’s share price for October alone fell by as much as 4.5%, bringing its YTD decline to 13.1%.

OCBC Investment Research noted:

Crude palm oil prices have been falling a lot faster than what the market had expected, hit by weaker-than-expected demand from China (leading to rising stockpiles in both Malaysia and Indonesia) as well as the apparent lack of substitution effect for the higher-priced soybean oil.

CPO futures are currently trading at around MYR2255/ton, or US$740/ton, versus some earlier forecasts by industry experts to hold around MYR2900-3300/ton. These industry experts now expect CPO prices to slip to around MYR2200/ton in 4Q.

Golden Agri-Resources, as the second largest palm oil plantation owner in the world, has undoubtedly been hit by falling CPO prices. For Oct alone, GAR’s share price fell by as much as 4.5%, bringing its YTD decline to 13.1%.

And should CPO prices remain around current levels for the rest of 4Q12, we can also expect downward revisions from the street for its FY12 estimates and could see a larger impact on FY13 forecasts.

Based on our estimates, CPO prices for 9M12 averaged around MYR3131/ton, or US$1027, but should CPO prices remain weak for the rest of 4Q12, we estimate that it could average around US$880 for the year.

However, we believe that GAR should still be able to achieve US$925/ton price assumption for this year, as long as CPO prices do not fall to US$600 in 4Q12.

However, for FY13, we are paring our CPO price assumption to US$750/ton (versus US$950 previously), which in turn will cut our revenue and earnings forecasts by 6.7% each.