Golden Agri’s productivity is expected to be higher than initially expected. The company’s investments in seed technology are expected to boost the CPO yield from 22.5% to 24% in FY09- 10 . According to Golden Agri, it has access to proprietary seed technology, which drives its superior productivity. Golden Agri has exclusive use of the ‘Dami’ seed. The seeds’ productivity is independently estimated by agricultural experts to be 20% higher than conventional seeds. This increased productivity raises our FY09F and FY10F net profit by 26% and 22%.

We expect a steady recovery in CPO prices in 2009. As stated in our sector piece ‘There may be trouble ahead’, dated 17 November 2008, we expect CPO prices to average US$520/t in 2009, compared to the average price of US$490/t in 4Q08. The recent 18% spike in CPO prices has led to a 37% rise in Golden Agri’s price since 1 December 2008. Golden Agri has also outperformed the STI’s 10% rise in this period. This demonstrates Golden Agri’s status as a liquid and deeply undervalued counter, benefiting from its significant exposure to the increasing CPO prices.

We recommend a Buy and raise our DCF-based target price to S$0.37, implying 23% upside potential. We value Golden Agri at 3.8x FY09F PE, compared to a sector average of 11x. Its EV/hectare of US$7,180 is roughly equal to the replacement cost. We value Golden Agri’s biological assets at US$3.1bn, which is 54% higher than its market capitalisation. We value its biological assets at a conservative average price assumption of US$504/t and a discount rate of 11%. We are 18% above Bloomberg consensus on FY09 net profit expectations.