Golden Agri-Resources (GGR SP) - UOB Kay Hian 2016-11-15: 3Q16 Results Within Expectation; Better Performances Across All Divisions

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources (GGR SP) - 3Q16 Results Within Expectation; Better Performances Across All Divisions

GGR reported satisfactory results for 3Q16 on the back of a strong improvement across all divisions qoq.
The plantation division’s performance was weaker yoy for 9M16, mainly due to weaker production. However, this was partly offset by better performances from downstream operations and the oilseeds division.

We expect production to continue to pick up qoq and GGR to see another strong quarterly performance in 4Q16.
Maintain BUY. Target price: S$0.42.

Golden Agri-Resources (GGR) reported a net profit of US$219.7m (+>100.0% qoq, net loss of US$16.4m in 3Q15) for 3Q16, bringing 9M16’s net profit to US$353.3m (net loss of US$9.2m in 9M15). The results were within our expectation. The better qoq performance for 3Q16 was supported by an EBITDA improvement across all the divisions.
For 9M16, EBITDA dipped by 1.6% yoy as it was dragged by the plantation division’s poor performance (EBITDA: -22.2% yoy). This was mainly due to lower production resulting from the severe El Nino weather conditions in 2015. Nevertheless, this was partly offset by a satisfactory yoy performance from palm & laurics as well as oilseeds divisions which saw EBITDA improve 63.6% yoy and 99.0% yoy respectively.
Management expects to continue recording a deferred tax income in 4Q16.
Excluding the deferred tax income, 3Q16 recorded a core net profit of US$61.6m, while 9M16’s came in at US$47.6m.

EBITDA improved significantly qoq for 3Q16 mainly due to higher FFB production qoq (+40.0% qoq). However, results remain subdued yoy, mainly on weak production due to the impact from the drought.
For 9M16, EBITDA decreased by 22.2% mainly due to the lower production yoy (- 21.1% yoy) and lower realised CPO prices yoy (-0.7% yoy). 4Q16’s EBITDA from this division is likely to be better qoq on higher production and a better ASP.
Management mentioned that total palm product output for 4Q16 is likely to be higher than that in 3Q16 and palm prices are also trading at a much higher level now vs 3Q16.

EBITDA jumped qoq and yoy, mainly attributed to a better margin. EBITDA margin improved to 3.7% in 3Q16 vs 0.8% in 2Q16 and 1.9% in 3Q15. The better refining margin for 3Q16 was due to a lack of palm supplies in the global market on weak production, while demand was supported by strong Indonesian domestic demand and relatively better exports vs 1H16.
For 9M16, EBITDA increased 63.6% yoy on a healthy refining margin. All in all, we expect an average EBITDA margin of 2-3% for the year.
Going into 4Q16, as supply is slowly picking up, refining margins are likely to be weaker than 3Q16’s. Overall, refining margins for 2016 would still be better than 2015’s.

EBITDA swung into the black to US$13.6m in 3Q16 vs the loss of US$1.3m in 2Q16, growing by +>100.0% yoy as market environment in China improved. EBITDA doubled yoy in 9M16 on the back of strong sales volume and a better margin.
However, we understand that the overall operating environment in China remains challenging. Thus, we reckon that the satisfactory results in 3Q16 might not be repeated in 4Q16.

For 9M16, FFB production dipped 21.1% yoy to 5.74m tonnes.
We maintain our FFB production growth forecast of -16% yoy for 2016, which is in line with management’s guidance of a 15-20% yoy decline.
Management expects FFB production could come in stronger in 4Q16 vs 3Q16. The production ratio would be at 40% from 1H16 and 60% from 2H16.
Meanwhile, we are expecting 2017-18 FFB production growth of 6.8% yoy and 9.2% yoy respectively as production is expected to recover as rainfall has been good in 1H16 and there has been no further stress on trees.

We are expecting an EPS of 1.0 US cents, 2.1 US cents and 2.1 US cents for 2016-18 respectively.

Maintain BUY and target price of S$0.42.
Our target price is pegged at 15x 2017F PE, its five-year average and in line with Singapore peers’ valuations.

Better-than-expected CPO prices. As one of largest upstream players in the sector, GGR has the highest leverage to CPO prices.
Continuous turnaround in its Chinese soybean crushing operations.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-15

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.420 Same 0.420