GAR’s 5-year bond trading at 5.42%. The golden era for palm oil.

Source: GAR: ^ Unaudited; 

Bullish CPO prices bolstered financial performance 

GAR’s revenue and OPBDIT boosted 43.8% and 72.1% y-o-y to USD10.2 billion and USD1.1 billion in 2021, ascribed to the CPO price soar. Consequently, the Group’s pre-tax profit was 4x higher, standing at USD725.5 million in 2021 compared to its previous corresponding year. We expect the financial profile to improve further in the near term, on the back of higher net realised CPO prices. 

Notwithstanding the stronger business position, the susceptibility of the group’s performance to CPO price movement remains the key risk factor.

Substantial short-term debt commitments but good access to external funding

GAR’s short-term debt of USD1.8 billion accounts for about 60% of overall debt in 2o21. Its short-term debt mainly constitutes trade facilities to fund inventories and trade receivables used for downstream operations. As at the same date, the cash and liquid investments only stood at USD498.9 million. Notwithstanding that, the Group has strong ability to tap into the capital market attributed to its long-standing relationship with a diverse pool of financial institution, according to the RAM.

Source: GAR; ^ Unaudited; FFO – Funds from operations

INDUSTRY OUTLOOK 

Russia-Ukraine war: A blessing in disguise for palm oil

Ukraine and Russian are major producers of sunflower oil, accounting for 7.3 million tonnes and 5.8 million tonnes respectively in 2020. The geopolitical conflict has hit supplies hard, causing a spike in cost of living in the Europe. As sunflower oil is listed among the “big four” vegetable oils (ranked behind palm, soya bean and rapeseed), its shortage triggers a scrabble to buy a substitute. Due to that, the Council of Palm Oil Producing Countries reports that palm oil will likely be a solution as the frying fat of choice. This, combined with a prolonged crisis may therefore put an inflationary pressure on CPO prices.

Plant-based diet gaining traction

Based on data by the Plant-Based Foods Association shows that the sales of plant-based food in the United States increased 27% 2020 and bringing the total market value to US$7 billion. This signals a strong demand for plant-based oil producer, which could benefit GAR’s business in the long term.

INVESTORS COULD CONSIDER THE 5-YEAR APRIL 2027 BOND 

We reckon in the current environment where benchmark yields are pressured upwards that could adversely affect client’s bond value down the road. In this regard, the 5-year tenure GGRSP Apr2027 Corp (MYR) provides a sweet spot for investors to consider and duration risks would be reasonable. 

The indicative price guidance of 5.42% is on the back of a recent rating upgrade from A1 to AA3 with a stable outlook, by rating agency RAM. It also the highest 5-year bond traded among peers in which we think investors could consider.

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