Golden Agri's profits feared to drop 11% to US$100.7m

Blame it on CPO price spike.

According to OCBC, crude palm oil (CPO) prices have started to turn lower recently, where the front month futures contract has just hit MYR2170/ton, probably the lowest level since Oct 2009, amid concerns that stockpiles (both CPO and soy) are expanding to record levels as production continues to climb even as global demand (especially out of China and India) remains weak. 

More worrying, market watchers expect to see further softening in CPO prices on supply concerns, given that production of CPO tends to improve in the second half of the year. 

Here's more from OCBC:

Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to remain vulnerable to further pullbacks in CPO prices.

Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. Hence, further weakness in CPO prices could also lead to downside risk for GAR, both in terms of profitability and share price.

To date, GAR has underperformed the broader market, falling 15% versus the STI’s 2% rise. 

Despite the brief spike in CPO price in 2Q, we note that the average CPO price has actually come off some 5% from 1Q, suggesting that its performance is likely to be quite muted. At the topline, we are expecting around US$1.28b (down 6% QoQ) and a core net profit of US$100.7m (down 11%).