Brokers’ take: CGS-CIMB downgrades Golden Agri-Resources to ‘hold’ on Indonesia palm oil export ban

CGS-CIMB has downgraded its call on Golden Agri-Resources to “hold” from “add”, as profit margins of the palm oil producer could take a hit from Indonesia’s palm oil export bans.

In a report on Thursday (May 12), the research team also cut its target price on the counter to S$0.30 from S$0.335, as it expects crude palm oil (CPO) prices could trend lower in the second half of 2022.

Shares of Golden Agri-Resources were trading at S$0.27 as at 9.36 am on Friday, down S$0.01 or 3.6 per cent.

Golden Agri-Resources on Thursday reported net profit of US$188 million for its first quarter ended Mar 31, 2022, jumping from the previous year’s Q1 net profit of US$41 million, on the back of stronger CPO prices.

Although the company posted strong first-quarter net profit, the research team said second-quarter earnings may weaken due to Indonesia’s palm oil export ban, which will cause higher logistic and storage costs.

It also noted that the fertiliser costs for the company could jump 60 per cent in the second half of 2022 as the company has not procured its fertiliser requirements for the period.

In April, Indonesia began a complete ban of palm oil exports to control domestic cooking oil prices and ensure a steady domestic supply.

CGS-CIMB expects the export ban will likely hit cash flow and raise logistic costs if prolonged, although it noted that the company has enough storage capacity to store its own palm oil production for now.

The research team raised FY2022 earnings forecasts for Golden Agri-Resources by 13 per cent to reflect higher CPO price assumptions amid the export bans, but cut FY2023 and FY2024 earnings estimates on higher operating costs.

SEE ALSO

Indonesia's flip-flops give Malaysia edge in top palm oil market India

Indonesia industry body confident palm oil export ban could end in May

Palm oil stocks drop on Indonesian export ban; analysts expect further spike to international prices

Meanwhile, RHB maintained its “neutral” call and target price of S$0.30 on the counter, as it does not expect the export ban will be in place for long.

While earnings should remain relatively healthy in FY2022 due to elevated CPO prices, valuation looks fair as the counter is trading within its peer’s range of 5 to 9 times the brokerage’s estimates for FY2023 earnings, the research team said.