Falling CPO prices threaten Golden Agri Resources's growth

Prices have been down 6% so far, whilst GAR’s shares have dropped by 16%.

The first quarter of 2018 was challenging for the palm oil industry and market watchers are worried over a production surplus in the second half of 2018 due to seasonality and low production in Q1, OCBC Investment Research said.

According to a report, crude palm oil (CPO) prices have continued to trend lower in 2Q2018 and are down about 6% so far this quarter. As for Golden-Agri Resources (GAR), its share price is down about 16% from the end of March whilst the STI is down about 5% over the same period.

OCBC Investment Research analyst Deborah Ong noted that the Indonesian rupiah has also depreciated by about 5.9% against the US dollar with most of the loss happening in 2Q2018.

“GAR’s sales to customers within Indonesia and China are denominated in their local currencies, whilst export sales for most of the group’s products and cost of certain key purchases are quoted in US dollars. Purchases and operating expenses in Indonesia and China are mainly denominated in their local currencies,” she added.

This should be accretive operationally to earnings, but the group is also exposed to currency translation risk as financials are reported in US dollar, Ong said.

The analyst said that if the IDR weakens against the US dollar by 5% with all other variables remaining constant, GAR’s pre-tax profit would have decreased by US$34.7m in 2017 and US$30.9m in 2016, likely impacted by translation losses. The pre-tax profit in FY2017 and FY2016 were US$114.1m and US$140.3m, respectively.

Moving forward, OCBC Treasury Research & Strategy continues to stay bearish over palm oil prices into 2H2018. “With supplies likely to go higher into 3Q2018 amidst lacklustre demand, the 3Q18 price outlook by OCBC Treasury Research & Strategy remains at MYR2,250/MT with downside risks. A recovery to the MYR2,400/MT level is forecasted into year-end as supplies dwindle then,” Ong said.