2 reasons why Golden Agri's near-term outlook isn't a very pretty picture

CPO prices fell again below MYR2,400/ton.

According to OCBC Investment Research, Golden Agri-Resources' near-term outlook remains weak. Its crude oil prices continue to struggle which has again fallen below MYR2,400/ton. Another key issue is the still-high stockpiles at its major planters.

Here's more:

CPO prices continue to struggle. The main reason for the expected near-term underperformance comes from the uninspiring CPO (crude price oil) prices, which has again fallen below MYR2,400/ton, weighed by worries that global demand will remain persistently weak, hurt by the ongoing crisis in Europe.

GAR, being the second largest oil palm plantation owner in the world, is highly sensitive to CPO price movements – we note a 0.71 correlation between its stock price and CPO prices over a three-year period.

Inventory issue remains key. Another reason for the poor sentiment probably comes from the still-high stockpiles seen at several planters in both Malaysia and Indonesia.

For GAR, the group continued to see another increase in its CPO stockpile - inventory at end Dec has risen by another
8%, or 37k tons, to 520k tons, as demand from China and India remained sluggish.

According to management, this is an excess of some 200k tonnes above its usual holding of ~320k tons.

Nevertheless, GAR remains upbeat that it can reduce the surplus by end 1H13, citing a growing demand for bio-fuel as current CPO prices (<US$900/ton) already make it viable as an alternative for crude oil.

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