Golden Agri Resources - DBS Research 2016-11-15: Boosted by tax credit

Golden Agri Resources - DBS Vickers 2016-11-15: Boosted by tax credit GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri Resources - Boosted by tax credit

  • Golden Agri Resources (GGR)'s 3Q16 core pretax of US$71m was below on an annualised basis, due to less-than-expected rebound in Plantation EBITDA.
  • This was partly offset by a 121% y-o-y jump in Palm & Lauric 3Q16 EBITDA to US$61m.
  • Smaller SG&A and US$111m tax credit helped to boost reported earnings.
  • FY16F/17F earnings adjusted by +77%/+22%; TP adjusted to S$0.39 on lower SG&A and tax rate .


What’s New 


3Q16 core pretax below expectations 

  • Golden Agri Resources (GGR)’s 3Q16 core pretax came in at US$71.0m (vs. pretax loss of US$29.3m in 3Q15). This brought 9M16 core pretax to US$92.2m – representing c.50% of our initial full-year estimates and 43% of consensus full-year expectations vs. 73% historical average.
  • Reported earnings for the quarter came in at US$219.7m (456% q-o-q; vs. net loss of US$16.4m in 3Q15), which included biological asset gains of US$45.3m, net FX gain of US$19.8m and net tax credit of US$111m.
  • The weaker-than-expected pretax was attributable to a less-than-expected 23% q-o-q rebound in Plantation EBITDA to US$90m – despite a 37% q-o-q jump in CPO output, sequentially flat CPO ASP, and 15% q-o-q lower unit cost.
  • This was however partly offset by a strong 369% q-o-q jump in Palm & Lauric EBITDA to US$61m and US$111m tax credit (in addition to US$131m already booked in 1H16). The tax credit arose from the Indonesian government’s one-off tax incentive, which offered a reduced 3% tax rate on any fixed asset revaluation gains submitted before 31 December 2016. We understand there could be further c.US$39m tax gains in 4Q16, subject to approval.


Fresh Fruit Bunch (FFB) output guidance maintained 

  • For the quarter, combined FFB output from GGR’s own and smallholder estates still dropped by 16% y-o-y (+40% q-oq) to 2.261m MT. Of this amount, own estates contributed 1.786m MT (-13% y-o-y; +40% q-o-q). We understand this year’s output would peak in November; hence, we anticipate 4Q16 output to sequentially expand further.
  • The group’s 3Q16 CPO ASP stayed flat q-o-q (+13% y-o-y), resulting in Plantations segment revenue of US$379m (+5% y-o-y; +28% q-o-q). 3Q16 Plantations EBITDA sequentially rebounded 23% to US$90m; but remained 6% lower y-o-y. This translated to EBITDA margins of 24%, down from 25% in 2Q16 and 27% in 3Q15.
  • The management maintained guidance of a 15-20% drop in this year’s FFB output. Hence, we are maintaining our production forecasts.

Palm & Lauric boosted by scarcity premium 

  • GGR’s Palm & Lauric segment reported a 121% y-o-y jump (almost fivefold jump q-o-q) in 3Q16 EBITDA to US$61m – translating to EBITDA margin of 3.7% - up from 1.9% in 3Q15 and 0.8% in 2Q16. We understand tighter supplies during the quarter had translated to price premium on refined products. Margins for this segment are expected to remain sustainable at c.3% in the near future; implying near-term downside to 4Q16 performance. In 9M16, the group’s direct selling covered 76% of export volumes.
  • The group (through SMART Corp) was allocated 79,340 kl of biodiesel production from Pertamina for a 6-month distribution term, from November 2016 through April 2017. This biodiesel allocation would come from its newly built 300k MT p.a. biodiesel plant located in South Kalimantan. Capacity at its biodiesel plant will eventually expand by an additional 300 MT p.a. by 1Q17 (complete with supporting infrastructure) at a cost of c.US$100m, making up most of its US$110m downstream capex this year. Total FY16F capex is projected at US$180m, of which US$166m was spent in 9M16. 

Oilseeds & Others: stable, but still for sale 

  • 3Q16 Oilseeds segment contributed EBITDA of US$14m (from EBITDA loss of US$1.3m in 2Q16 and US$3.0m in 3Q15) – against a broad-based recovery in oilseeds crushing margins in China. This translated to EBITDA margin of 9.6% vs. 2.0% in 3Q15 and -0.7% in 2Q16. 
  • While the strong margin is not sustainable in the long run, we understand there may be less volatility going forward.


Outlook 


FY16F/17F earnings adjusted by +77%/+22% 

  • We adjusted GGR’s FY16F/17F earnings to take into account: 
    1. Higher 2016 tax credit. For the year, we understand the group would book c.US$300m of tax credit vs. US$92m in our initial expectations.
    2. High feedstock costs. Given the lower-than-expected plantations EBITDA, we had adjusted our FFB feedstock costs higher.
    3. Cuts in forecasts SG&A expenses. Based on 9M16 results, we understand both freight and A&P expenses were significantly below our initial expectations.
    4. Reduce long-term tax rate to 20% from 25% previously; given consistent contribution from lowertax jurisdiction.
  • While keeping our CPO price forecasts and volumes intact, changes to our forecasts resulted in +77% and +22% revisions to FY16F and FY17F earnings respectively.


Valuation 

  • Our DCF-based TP is adjusted slightly upwards to S$0.39 (WACC 11.6%; TG 3%). The higher TP principally reflects lower SG&A costs and tax rate. 
  • Our new TP implies no upside from current level. We do not have a rating on this counter.




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-11-15
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.39 Up 0.330




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